Abstract
This paper examines how seller pricing decisions influence listing contract length and how these decisions affect price and liquidity in housing markets. Because list price affects broker effort required to sell the property, brokers respond to seller overpricing by increasing the negotiated listing contract length. At the same time, sellers respond to longer listing contracts by adjusting their list price strategy. Both list price and length of marketing time affect broker sales effort and therefore a property’s realized selling price and liquidity. Analysis of house transaction data from Virginia indicates that greater over-pricing by sellers prompts brokers to pursue longer listing contracts, which subsequently lengthen marketing time but increase selling price. The results reveal a novel transmission mechanism from higher list price (which induces longer contracts) to selling price and liquidity.
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Notes
See, for example, Miller (1978), Zorn and Larsen (1986), Miller and Sklarz (1987), Knight et al. (1994), Yang and Yavas (1995), Yavas and Yang (1995), Knight (2002), Anglin et al. (2003), Benefield et al. (2012), and Brastow et al. (2012). See Cheng et al. (2008) for a review of studies of time on the market studies and its relationship to pricing.
For example, relevant to our sample, the Commonwealth of Virginia code 18 VAC 135-20-290 considers entering into a brokerage relationship without a specific definite termination date to be an action that constitutes improper dealing.
One might ask whether agents have discretion over listings or if brokers set standards for the firm that most agents follow. There is substantial variation of contract length within brokerages and for individual agents, suggesting that agents do, in fact, have substantial discretion. Anova results are available upon request.
Under rational expectations the first phase equilibrium is the backwards induction solution to the two-stage game.
In practice, sellers may revise their initial listing price. However, given the broker’s expertise, this should not impact results.
Following Rutherford et al. (2005) we base DOP on the original list price rather than on a potentially revised asking price at time of sale. Negotiated LOC and DOP in the contracting phase must be based on the original list price. Those variables influence selling phase outcomes through the supply of broker effort. Other authors, notably Merlo and Ortalo-Magné (2004), examine how the listing price changes when new offers arrive and the sequencing of events in the selling process. Potential list price revisions are outside the scope of our paper.
Hedonic list price estimates are based on property and economic characteristics, including ln(sqft), ln(age), mobile, quick, bedrooms, full bath, half bath, listtime, listtimesq, location fixed effects,, vacant, finbase, pool, paved drive, fenced yard, hardwood, ceramic tile, carpet, brick, vinyl siding, garage, fire, one story, two story, and mtg rate. DOP estimation results are not reported here but are available upon request.
For additional discussion of neighborhood choice and housing demand see Ioannides and Zabel (2008).
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The authors thank, without implicating, Charles Carter, 2012 AREUEA session participants, and anonymous referees for their helpful comments.
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Anderson, R.I., Brastow, R.T., Turnbull, G.K. et al. Seller Over-Pricing and Listing Contract Length: The Effects of Endogenous Listing Contracts on Housing Markets. J Real Estate Finan Econ 49, 434–450 (2014). https://doi.org/10.1007/s11146-013-9440-1
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DOI: https://doi.org/10.1007/s11146-013-9440-1