Price and Trading Volume in Real Estate Markets

THE SPEAKER Dr. Zhenguo (Len) Lin received his PhD from University of Wisconsin, Madison. His research is mainly focused on pricing illiquidity of private assets, mortgage markets, and housing market dynamics. Dr. Lin was ranked 4th globally for the period of 2013-2017 based on the most recent ranking in real estate research (Saginor 2017, Journal of Real Estate Literature). In 2013, he received the William N. Kinnard Young Scholar Award, an international recognition for making significant contributions in his field. His recent studies include immigrants and mortgage delinquency as well as racial discrimination in mortgage costs. His work “Spillover Effects of Foreclosures on Neighborhood Property Values”, which appeared in the 2009 Journal of Real Estate Finance and Economics, has proven invaluable in predicting the recent housing crisis. The paper has been heavily cited by over 300 academic studies. It has also garnered much recognition outside of the academic community – the paper was cited by former Federal Reserve Chairman Ben Bernanke in his speech at the Global Financial Literacy Summit on June 17, 2009 in Washington, DC.   Prior to joining the faculty of Florida International University, Dr. Lin was a Full Professor of Finance and Associate Director of Real Estate and Land Use Institute at California State University, Fullerton. He also taught at Mississippi State University and worked as Sr. Economist at Fannie Mae.   ABSTRACT This study presents an alternative theory to explain the widely documented positive price-volume correlation in the housing market. Unlike some earlier theories that hinges upon the presumption of sellers’s equity constraints such as down payment requirement, or aversion to nominal losses, we present a simple search model in which a rational seller with non-trivial search cost seeks to optimize his selling objective. We develop a set of closed-form solutions which conclusively shows that the positive price-volume correlation at the macro market level is merely the result of individual sellers (rationally) seeking optimal selling outcomes at the micro market level. This conclusion holds true under alternative search model and regardless the presence (or absence) of sellers’ equity constraints. The results reveal rich insights into the intricate relation- ships between housing price, time-on-market, and trading volume. It lends theoretical support to a number of prior empirical studies and offers reconciliation to some of the conflicting findings.