Testing for Information Asymmetries in Real Estate Markets
We study equilibrium outcomes in markets with asymmetric information about asset values among both buyers and sellers. In residential real estate markets hard-to-observe neighborhood characteristics are a key source of information heterogeneity: sellers are usually better informed about neighborhood values than buyers, but there are some sellers and some buyers that are better informed than their peers. We propose a new theoretical framework for analyzing such markets with many heterogeneous assets and differentially informed agents. Consistent with the predictions from this framework, we find that changes in the seller composition towards (i) more informed sellers and (ii) sellers with a larger supply elasticity predict subsequent house-price declines and demographic changes in that neighborhood. This effect is larger for houses whose value depends more on neighborhood characteristics, and smaller for houses bought by more informed buyers. Our findings suggest that home owners have superior information about important neighborhood characteristics, and exploit this information to time local market movements.
This paper was previously circulated as "Knowing your neighborhood: Asymmetric Information and Real Estate Markets." We thank Viral Acharya, Yakov Amihud, Aurel Hizmo, Andreas Fuster, Stefano Giglio, Theresa Kuchler, Stijn van Nieuwerburgh, Matteo Maggiori, Holger Mueller, Monika Piazzesi, Florian Scheuer and Amit Seru, our discussant Chris Parsons, as well as seminar participants at Stanford University, Chicago Booth, Berkeley Haas, New York University and the 2013 Summer Real Estate Symposium. We thank Trulia for providing data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pablo Kurlat & Johannes Stroebel, 2015. "Testing for Information Asymmetries in Real Estate Markets," Review of Financial Studies, Society for Financial Studies, vol. 28(8), pages 2429-2461. citation courtesy of