Market Making in the Residential Real Estate Market
Abstract
This research investigates using a market maker mechanism in the 1998 Northern Virginia residential real estate market. Market maker functions are defined and described as they have been characterized in the literature. The benefits of having market makers range from shortening trading time and reducing transaction costs to transmitting information quicker and cheaper and reducing total selling costs and equilibrium prices. The market maker assumes risk from the seller and provides future liquidity to buyers. Real estate agents are not true market makers since they do not fulfill most market maker functions. Ideas from many authors are used to describe theoretical models of the existing and alternative market structures. Almost all sellers currently list their homes with a realtor using the Multiple Listing Service (MLS), indicating that trying to sell their home on their own or becoming a landlord are unattractive options. Although for buyers there is very little difference, market makers make a big difference for sellers. Since sales to a market maker are immediate, there is no need to discount expected future revenues. The data for this study comes from the 1998 Northern Virginia MLS sales database. After the theoretical models are reduced using some basic assumptions about the real world market, regression analysis is used to estimate sales prices. Sales timing data is used to compute the probabilities of selling a home as well as the revenues and costs of the market maker. The final results are shown for several different assumed discount rates.
Document Details
- Document Type
- Technical Report
- Publication Date
- May 01, 2001
- Accession Number
- ADA392143
Entities
People
- Curtis G. Tenney
Organizations
- Air Force Institute of Technology