House List Prices and Durations in Boom and Bust

Housing markets have a large impact on the macro economy. The recovery of house price declines is usually slow, as transactions decline in a slump. In this paper we present new evidence of list price dynamics in up and down markets, using a novel dataset on actual list prices in the Dutch housing market. We study the years 2006-2010 covering a boom as well as a bust period and find evidence of marked differences in list price dynamics. In a strong market, overpricing increases the probability of a list price reduction suggesting a ‘start-high, reduce early' pricing strategy. In a weak market, overpricing has the opposite effect: overpriced homes are least likely to decrease the list price. This is consistent with reference-dependent pricing strategies for sellers in the housing market. We conjecture that these strategies follow from a reluctance to realize paper losses that becomes more prominent in a declining market