Hedonic Modeling of the Home Selling Process

Abstract

Many aspects of the housing market distinguish it from a perfectly competitive market. In a perfectly competitive market, a large number of buyers and sellers, together with ease of entry and exit, ensure that all participants are price takers. The marketplace is clearly defined and products in such markets are perfectly homogeneous. Moreover, information about price is easily obtained and instantly known. Housing markets are quite different. Products in housing markets are differentiated to varying degrees, and information about the quantity and quality of the amenities that compose the price is difficult and costly to obtain. Transactions ultimately involve one buyer and one seller who bargain over an unknown price. Entry and exit are severely constrained by the large capital sums involved as well as by the relatively high transactions costs. These aspects of housing markets make the selling transaction a process rather than an event. The process begins on the seller side with the choice of a selling strategy that includes setting an initial listing price. The second phase of the process involves the contemporaneous searches of the seller and the prospective buyers. During this phase, the buyer gathers information and makes comparisons among comparable available homes that meet the buyer’s housing needs. Inspection of these homes reveals the quantity and quality of amenities of importance to the buyer. At the same time, the seller is gathering information about the market’s valuation of his property from the arrival rate and presence or absence of bids from prospective buyers. The seller may use this information to alter the selling strategy, perhaps by revising the listing price. The search phase ends when a prospective buyer finds a match for his housing needs and initiates the next phase of the process, bargaining, by making an offer for the home. The selling process concludes when buyer and seller agree on a selling price and complete the transaction.