Motivated sellers and predation in the housing market

We develop an equilibrium search model of the housing market where sellers may become distressed as they are unable to sell. A unique steady state equilibrium exists Where distressed sellers attempt liquidation sales by accepting prices that are substantially below fundamental values. During periods where a large number of sellers are forced to liquidate customers exhibit 'predation': they hold off purchasing and strategically slow down the speed of trade, which in turn causes more sellers to become distressed. The model naturally suggests several proxies of liquidity. Interestingly, the average time on the market (TOM), one of the most frequently used statistics in the literature, does a poor job within the context of liquidation sales and predation. Specifically we show that TOM falls during periods of predatory buying, which, if interpreted on face value, indicates that the market becomes more liquid with predation. We propose an alternative proxy - the profit loss in fire sales - which appears to be a more robust measure of liquidity than TOM. (C) 2013 Elsevier B.V. All rights reserved.