Why Do Housing Markets Freeze? Investigating House Lock, Nominal Loss Aversion, and Irreversible Construction

Date: Friday, November 30, 2018
Speaker(s): Joshua Abel, Ph. D. candidate in Economics, Harvard University

12:15 pm, Joint Cetner for Housing Studies.

Housing cycles are marked not only by large swings in home prices but also by significant shifts in the number of homes being sold. Popular explanations for these joint movements focus on the role of falling prices in deterring selling behavior, either by wiping out homeowners' equity ("house lock") or due to cognitive frictions that make households loathe to realize losses on investments ("nominal loss aversion"). Drawing on a comprehensive dataset of U.S. home sales, Abel found that while there is evidence that both of these mechanisms are active at the household level, they explain no more than 10 percent of the decline in sales during the recent housing crisis. He then proposes a novel mechanism, in which construction of new homes spills over into sales of existing homes as households churn up the housing ladder. When construction freezes in a housing bust, this churn slows and sales volume collapses.

This event is part of our Research Seminar Series, which are held on Fridays at lunchtime, during the academic year, and are live-streamed on Twitter.

Read More About: Housing Markets & Conditions