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Selling time and selling price: the influence of seller motivation.
by Michel Glower , Donald R. Haurin , Patric H. Hendershott This study is of a significant, understudied topic - the importance of seller heterogeneity in the search process for housing. We study the influence of heterogeneous seller motivation on the setting of the list price, marketing time and transaction price. Variations in the list price of similar properties might be attributed to random seller errors or to sellers' strategic behavior. Unexplained residuals in hedonic house price estimations might be attributed to unobserved attributes of the property, or they might be the result of heterogeneity in sellers' reservation prices. Variations in marketing time are in part due to random variation, but also could reflect systematic differences in sellers' desire to sell. Using data from a new survey, we directly measure indicators of a household's motivation to sell its home, and we use these measures to test the above competing explanations. Our results are plausible, and they differ substantially from those current in the housing-search literature. Literature Review Early studies of the marketing time of real estate estimated the relationship between selling price and selling time (Cubbin 1974, Miller 1978). Later studies tried to clarify the relationship by examining the effect of list prices, interest-rate levels and volatility, and degree of capitalization of special financing on marketing time (Belkin, Hempel and McLeavey 1976, Kang and Gardner 1989, Ferreira and Sirmans 1989, Asabere and Huffman 1993). Recent studies have developed models in which selling price and selling time are jointly determined. These studies consider the effects of atypical housing characteristics, list prices and broker behavior on selling time and selling price (Haurin 1988, Read 1988, Larsen and Park 1989, Geltner, Kluger and Miller 1988, Arnold 1992, Yavas 1992, 1994, Asabere, Huffman and Mehdian 1993, Green and Vandell 1994, Sirmans, Turnbull and Dombrow 1995, Mantrala and Zabel 1995, Forgey, Rutherford and Springer 1996, Genesove and Mayer 1994). Haurin (1988) applies the standard search model to sellers and argues that the greater the atypicality of a property, the higher the seller's reservation price and the longer the expected wait for an acceptable offer. Although properties are heterogeneous in his model, sellers are not. Read (1988) also assumes imperfect information in the housing market, a stochastic buyer arrival process and idiosyncratic housing attributes. He finds that rational sellers revise their reservation prices in response to market information (arrival rate of buyers). Although Read (1988) does not formally consider the effect of differences in seller holding costs upon the optimal reservation price strategy, he shows that if the (exogenously fixed) length of time allowed for a sale is reduced, the initial reservation price is lower. A lower reservation price in our framework suggests a shorter time on market and lower sale price. Quan and Quigley (1991) present a model of heterogeneous buyers and sellers and derive the bargaining solution for the transaction price of a property (a function of buyers' and sellers' "urgency" to conclude a transaction) and the expected market distribution of transaction prices. They find that the greater a seller's urgency to sell, the lower the seller's reservation price. Time on market is not analyzed. Miceli (1989) and Geltner, Kluger and Miller (1988) focus on the optimal contract between seller and broker. Miceli notes that sellers may not simply maximize sale price, but may also consider "minimizing the amount of time it takes to obtain a pre-agreed (reservation) price . . ." (1989, p. 268), or some combination of the two goals.(1) However, his model considers only a single type of seller. He includes comparative statics analysis of the effect of variations in a seller's discount rate on the optimal contract length, but no analysis on expected marketing time or sale price. Geltner, Kluger and Miller discuss how variations in seller holding costs affect the seller's reservation price. Through simulations, they find that the greater the time cost of holding a property, the lower the seller's reservation price. Also, the greater the spread of buyer valuations for a particular property (a measure of atypicality), the greater the reservation price. Arnold (1992) investigates sellers' search in a model with brokers, focusing on the incentive compatibility of various contracts. He allows for differences in a seller's cost of holding a property and recognizes that seller costs will affect the preference for broker characteristics and contract type. While expected marketing time is not modeled, he finds that a seller's reservation price decreases with increasing holding cost. The ...
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