Equilibrium Dynamics in a Matching Theoretic-Model of the Housing Market

Abstract

In light of the recent and growing literature which has extended the use of search and matching models even to the housing market, this paper introduces dynamic analysis to a simple stationary state equilibrium model. Contrary to what occurs in the labour market, the dynamic adjustment to equilibrium depends on the level of matching frictions present in the market. Precisely, if matching frictions are high, sellers bear in mind future expectations regarding total vacancies when deciding how many vacancies to post on the market; as a consequence, the market tensions respond quickly to any changes, immediately reaching the equilibrium value. Instead, with low matching frictions any dynamic adjustment path leads to equilibrium without the need for “forward looking” behaviour on behalf of sellers.