List price signaling and buyer behavior in the housing market

Abstract

To determine whether list price contains useful information for anticipating trends in eventual transactions prices, we develop a model of buyer behavior from a search-theoretic perspective. Using data from the Baton Rouge, Louisiana, housing market between 1985 and 1992, we estimate separate price indexes with list price and selling price as the respective dependent variables in the hedonic regressions. Consistent with our theory, we find that the list price may lead the market when functioning as a signal of seller intent, but list price will probably lag a market driven by buyer willingness to purchase. Granger causality tests conducted on quarterly data for the eight-year study support listing price as a leading indicator of selling price. However, an examination of the indexes around the period of market reversal suggest otherwise. Indeed, listing prices appear to contain the least useful information at the times when information would be most valuable: at the peaks and troughs of the market cycle.