This paper adopts a search model to examine individual seller’s pricing strategy under two market conditions: first, sellers have reference-dependent utility; second, the housing market is less heterogeneous, such as multi-unit residential market. Acknowledging the fact that units in the same building serve as close substitutes for each other, we show that within the same building, a recently realized transaction price may generate two signaling effects on potential buyers’ willingness to pay. First, the average willingness to pay among buyers is positively correlated with the observed price level, which we interpret as a spatio-temporal autocorrelation effect; second, after observing a price signal, the heterogeneity of potential buyer’s willingness to pay decreases, which urges the seller to mark down the asking price. Using a geo-coded dataset on condominium transactions in Singapore, we find significant evidence of the reference dependence effect. Meanwhile, we find that the spatio-temporal autocorrelation among the units in the same building is significantly higher than with the units in the neighboring buildings. Furthermore, after controlling for the autocorrelation effect, we find that sellers tend to mark down their asking prices if a recent transaction has occurred within the same building, consistent with the prediction from decreasing bidding heterogeneity. We also propose a measure on potential buyers’ outside option and find consistent evidence that the realized transaction price decreases with the outside option. Finally, using a proxy measure on the exogenous arrival rate of potential buyers, we show evidence that sellers’ asking prices tend to increase with the arrival rate, as predicted by the model.
The Journal of Real Estate Finance and Economics – Springer Journals
Published: Mar 16, 2013
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