Why Do Inventories Rise When Demand Falls in Housing and Other Markets?
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.
Data provided by the National Association of Realtors is gratefully acknowledged. I thank Gary Becker, Peter DeMarzo, Darrell Duffie, Dirk Jenter, David Kreps, Donald Marron, Kevin M. Murphy, Jesse Shapiro, Kathryn Shaw, Robert Shimer, and Andy Skrzypacz for useful comments. Nicholas Obradovich provided excellent research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
“ 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