The Housing Market: A Complex Economic System
The housing market is a complex and unique economic system, in which a large number of stakeholders interact. It includes buyers and sellers of houses, real estate agents, real estate investors, contractors, renovators, and many other actors.
The Role of Emotions in Homebuying Decisions
Homebuyers often make emotional decisions about house purchases because they are trying to satisfy their individual interests. This is especially true for a house purchase that involves a family. The household members are influenced by their spouses, children, wider family, and other advisors who have opinions about the house and about the buyer (and whose emotions are also involved).
The Importance of Social Collectivities in the Housing Market
A large part of the housing market is driven by social collectivities that involve neighbors. This is particularly the case for neighborhoods where people live, as the residents tend to know each other and to interact with one another on a daily basis. This can be important for families with small children who want to play safely outside and have access to a variety of sports activities.
Institutional Aspects Affecting Housing Markets
Moreover, there are a number of institutional aspects that affect housing markets. The main ones are: search, matching, and bargaining; intermediation, including brokerage fees, transaction taxes, and moving costs; and liquidity, as measured by time-on-market.
The Unique Nature of the Housing Market
In this article, we will review research that examines these elements and tries to understand why the housing market differs from other markets in some fundamental ways. The most important of these differences is that the market is characterized by a wide range of strategic choices that are made by both buyers and sellers, which are not easily modeled in standard competitive models.
Research on Housing Outcomes
This fact has led to the development of a variety of empirical and theoretical research on how these factors influence housing outcomes. The results of these studies provide a valuable contribution to our understanding of how different forces impact search, matching, and bargaining and how intermediation plays a role in the process.
The Microstructure of the Housing Market
The microstructure of the housing market is an important aspect to consider in any analysis of housing markets because it has implications for how the outcome of a housing transaction can be measured and how we should design our models to capture these outcomes. In particular, there are three aspects of the housing market that are unique and must be taken into account: i) heterogeneity in houses; ii) the fact that transactions are driven by a range of market frictions and are not completely transparent; and iii) the liquidity issue, which is a major concern for a range of economic analysis.
Heterogeneity in Houses
First, houses are heterogeneous: they come in different sizes and features and are located in a wide range of locations. These heterogeneities are the source of considerable spatial variation in prices for similar properties across different locations. This means that the market is not fully transparent and that sellers and buyers are unable to predict with certainty the price that they will pay or accept for a house.
The Role of Intermediaries
Second, there are a large number of players in the market, many of whom are amateurs. This has led to a variety of institutions that are unique in their role in the housing market, including the real estate agent, which is an intermediary in the process.