Three Essays on the Efficiency of Real Esate Markets

Abstract

The U.S. real estate markets have undergone substantial fluctuations in recent years. This dissertation attempts to understand the effects of some market fundamentals on residential real estate market outcomes and efficiency from both theoretical perspective and empirical evidence. This research contains three research projects.

First, a number of papers have identified the positive return of market size on matching outcomes when the market exhibits frictions. In the second chapter, I develop a novel directed search model that connects home list price, reservation price with the sale outcomes and empirically test the thick market effects on trading efficiency in housing market using home transaction data in Dallas metropolitan area during 2006 to 2008. The results present strong and robust market size effects that houses on thicker market are listed and sold at higher prices and significantly faster speed.

The third chapter studies principal-agent problems in real estate markets, where the brokerage service is often used to facilitate home sales. The seller agent gets percentage commissions from the home owner and splits with the buyer agent in reward for producing the buyer. A seller agent sometimes serves as dual agent that represents both the seller and buyer sides and gets all commissions. I introduce a theoretical model and present evidence from Dallas metropolitan housing market that the agency structure may create principal-agent problems. I find that the dual-agent-assisted home sales on average give 2.6% more discount on final price than home sales that are assisted by two agents. Competition among home buyers may reduce the severity of principal-agent problems.

The fourth chapter deviates from the rational agent assumption and investigates the behavioral impacts of price endings on home sales. Recent literature in behavioral economics suggests that price endings have some psychological impacts on buyer's purchasing decision. In real estate markets, both round price and precise price (or nine ending price) strategies are used in home sales. From the panel data and regression discontinuity analysis of Dallas housing market transactions, I find homes listed with precise price are on average sold at 4.6% higher price than homes listed at round price only when prices are less than their nearby round prices, favoring the nine ending price literature.