Can the Mortensen-Pissarides Model Match the Housing Market Facts?

In the housing markets three basic facts have been repeatedly reported by empirical studies: the existence of price dispersion, the trade-off between housing price and time-on-the-market, and the positive correlation between housing price and trading volume. Since housing markets are characterised by a decentralised framework of exchange with important search and matching frictions, this paper examines whether the baseline search and matching model can account for these three basic facts. We find that the direct relationship between market tightness and house price, derived by the standard matching model, is the key mechanism to explain the basic facts of the housing market.