DP16133 Housing market discount rates: Evidence from bargaining and bidding wars

Author(s): Hans R.A. Koster, Jan Rouwendal
Publication Date: May 2021
Date Revised: May 2021
Keyword(s): bidding wars, home seller behaviour, list price, sales price, sales time, Time Preference
JEL(s): H43, R21, R30
Programme Areas: Financial Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16133

We show that time preferences are paramount in understanding sellers' list price-setting. To measure discount rates from data on house sales, we set up a methodology that retrieves discount rates in settings of bilateral bargaining between one seller and one prospective buyer, as well as bidding wars where multiple prospective buyers make a bid. Using data on more than 1 million housing sales in the Netherlands with information on list prices, sales prices, and time-on-the-market, and addressing endogeneity concerns, we show that the implied short-run discount rates are between 30 and 60%. As these rates are an order of magnitude above the prevailing market interest rates, sellers seem to undervalue the gains associated with higher list prices that come at the cost of a longer average time-on-the-market.