Abstract

Assessing the quantitative relevance of match quality and search frictions for
house price dispersion is key to understanding house price formation and the importance of uninsurable housing wealth shocks. In this paper, we use a unique
auction-level data set from Norway, combined with a structural model of the housing
transaction process that includes frictional arrival and endogenous entry of
buyers into bidding, as well as information frictions between buyers and sellers, to
determine the importance of buyer taste heterogeneity for house prices and price
dispersion. We find that quality differences matter greatly for house price dispersion,
well beyond what hedonic pricing models may suggest, while buyer taste
heterogeneity accounts for the majority of the remaining price dispersion. Our
structural model implies that list prices often deviate substantially from seller valuations, lending support to theories of list price determination that feature strategic
interactions between sellers/agents and buyers.