NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Why Do Inventories Rise When Demand Falls in Housing and Other Markets?

Edward P. Lazear

NBER Working Paper No. 15878
Issued in April 2010
NBER Program(s):   EFG   IO   PR

Inventories and price changes are correlated. The inverse relation is most obvious in housing where inventories build in low demand markets and shrink in high demand markets. This is a puzzle. Symmetry of information among buyers and sellers would seem to imply that sellers would change their reservation value by the amount that buyers change their offers. Because there is heterogeneity among buyers in the valuation of a given house, sellers set prices strategically. When demand falls, sellers rationally lower their prices, but not by enough to keep the probability of sale constant. As a result, inventories grow.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w15878

Published: “ Why Do Inventories Rise When Demand Falls in Housing and Other Markets?,” The Singapore Economic Review , Vol. 57, No. 2 (2012) 1250007 (32 pages), DOI: 10.1142/S0217590812500075

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