Flipping the Housing Market

Abstract

We add arbitraging middlemen-investors who attempt to profit from buying low and selling high-to a canonical housing market search model. Flipping tends to take place in sluggish and tight, but not in moderate, markets. There is the possibility of multiple equilibria. In one equilibrium, most, if not all, transactions are intermediated, resulting in rapid turnover, a high vacancy rate, and high housing prices. In another equilibrium, few houses are bought and sold by middlemen. Turnover is slow, few houses are vacant, and prices are moderate. Moreover, flippers can enter and exit en masse in response to the smallest interest rate shock. The housing market can then be intrinsically unstable even when all flippers are akin to the arbitraging middlemen in classical finance theory. In speeding up turnover, the flipping that takes place in a sluggish and illiquid market tends to be socially beneficial. The flipping that takes place in a tight and liquid market can be wasteful as the efficiency gain from any faster turnover is unlikely to be large enough to offset the loss from more houses being left vacant in the hands of flippers. Based on our calibrated model, which matches several stylized facts of the U.S. housing market, we show that the housing price response to interest rate change is very non-linear, suggesting cautions to policy attempts to "stabilize" the housing market through monetary policy.

The dynamics of the house price‐to‐income ratio: Theory and evidence

“…For instance, Yiu et al (2013) propose a time series test for real-time bubble detection. Based on a search-theoretic model, Leung and Tse (2017) suggest that the increase in the cost of funds for speculators could lead to a significant house price adjustment. Huang et al (2018) build another search-theoretic model and suggest that the price-rent ratio and turnover rate are essential indicators for a housing-related crisis.…”

Financial conditions, local competition, and local market leaders: The case of real estate developers

“…This paper may also contribute to the literature on the marketing stage of housing supply, which studies the relationship between the housing price and time-on-the-market (TOM). Most studies in that literature focus on the secondary market, where buyers and sellers engage in a search-and-matching process (e.g., Allen et al, 2005;Anglin, 1997;Knight, 2002;Leung and Tse, 2017;Yavas, 1992). On the other hand, this paper focuses on the asymmetric primary market, where sellers (i.e., real estate developers) and buyers (often households) arguably have very different bargaining power (BP) may be overlooked.…”

“…Sellers can either sell the house immediately with certainty at the current market price, or fish for a better price by waiting for high-price bidders. This fishing strategy will induce high transaction price co-existence with long TOM (Stein, 1995;Leung and Tse, 2017). Also, potential buyers may regard TOM as a sign of unobserved information like housing quality (Taylor, 1999).…”

One and the Same? A Systematic Literature Review of Residential Property Investor Types

“…Residential investments attract larger numbers of “unsophisticated investors,” as it appears to require less specialization and financial knowledge than other investments (Hui, Zheng, and Wang 2013). On the contrary, however, Leung and Tse (2017) highlight the importance of knowledge and insight into market dynamics on the basis of a simulation of investment outcomes for “informed” and “uninformed” investors. Similarly, Hwang and Quigley (2010) address the influence of informational advantage on investment outcomes.…”