Vanhapelto, Tuuli and Magnac, Thierry (2024) Housing Search and Liquidity in Spatial Equilibrium. TSE Working Paper, n. 24-1596, Toulouse

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Abstract

Local housing markets differ in their liquidity, the ease of transacting. Transacting is often easier in urban rather than rural locations, for example. To rationalize these liq-uidity differences, we set up a model of housing search in the cross-section of multiple interconnected local markets. Markets vary in structural characteristics, leading some to be in higher demand than others, which in turn affects equilibrium liquidity across local markets. Taking the model to data in Finland, we find that the housing market consists of very heterogeneous segments, and especially the value of housing services and the efficiency of the meeting technology matter for the cross-sectional variation in liquid-ity. Accounting for equilibrium buyer sorting is important: characteristics like the value of housing services affect liquidity both directly but also by attracting more prospective buyers into the market.