Price Adjustment and Liquidity in a Residential Real Estate Market with an Accelerated Information Cascade
Salter, Sean P., King, Ernest W., The Journal of Real Estate Research
We examine the effect of an unannounced information event, Hurricane Katrina, on the liquidity of the residential real estate market in an area proximately located to the Mississippi Gulf Coast. Using 2SLS and Weibull techniques applied to a unique MLS data set, we test changes in liquidity in a submarkets framework. Results suggest Katrina created submarket effects with respect to the listing and sales periods of our sample and market liquidity was directly influenced by this event. We suggest that this effect was tied to information flow as owners of heavily damaged properties sought new housing in a nearby area.
On August 29, 2005, Hurricane Katrina made landfall near Biloxi, Mississippi. As has been well-documented, Katrina proved to be the costliest Atlantic hurricane in the history of the United States, causing total damages in excess of an estimated $80 billion (USD). The world watched as television crews captured photographic evidence of this deadly natural disaster, which not only damaged property but also contributed to at least 1,599 deaths (estimated), making it the deadliest natural disaster since the San Francisco Earthquake of 1906.1
One of the most obvious effects to those living in the affected areas was the immediate shock to the populations of the distressed region. The New Orleans, Louisiana, MSA, with an estimated population of 1.3 million people before the disaster, was almost abandoned after the Lake Pontchartrain levees failed and the city flooded. Likewise, the Mississippi Gulf Coast Region (Jackson, Hancock, and Harrison Counties) sustained an incredible amount of damage that was directly related to the tidal surge and hurricane-force winds that assaulted that area. Infrastructure, businesses, and residential areas were destroyed or severely damaged, leaving inhabitants to seek alternative living space in a temporary, semipermanent, or permanent manner.
Hurricane Katrina provides a unique case study to examine the effect of an unexpected event on residential real estate market dynamics. Prior to Katrina's landfall, no one could pinpoint the area that would be affected nor could they accurately estimate the scope of the effect Katrina would have on an entire region. This combination of factors makes Hurricane Katrina an extremely interesting information event. How did Hurricane Katrina affect areas on the periphery of the extreme devastation? The Hattiesburg, Mississippi, MSA received quite a bit of damage, but basic services were generally restored within two weeks of Katrina's landfall. Individuals who fled their destroyed or severely damaged properties on the Mississippi Gulf Coast or in Louisiana were able to relocate to the Hattiesburg area, where they could evaluate their individual situations while remaining in relatively close proximity to their domiciles.
We present this post-Katrina real estate market in the context of the theoretical model developed in Forgey, Rutherford, and Springer (1996), which models liquidity in a residential real estate setting. We construct both hedonic pricing and time-on-market models to test the impact of Hurricane Katrina on selling prices and marketing times of residential properties in the Hattiesburg, Mississippi, MSA. Our empirical tests align with theory, and our a priori expectation, which is driven by our theoretical application, is that market mechanisms will alter property prices and marketing times (and therefore liquidity) based on the effect of Hurricane Katrina.
The following section reviews the pertinent literature and presents the theoretical motivation for our study. Section Three introduces the data used to test our empirical models, and Section Four discusses the methodology for our modeling efforts and the results of our statistical models. Section Five concludes.
Residential Real Estate and Market Efficiency
The residential real estate brokerage literature is rife with studies focused on the effect of property characteristics, revealed information, marketing strategies, and other factors on property price. …