
A friend reports that he just sold his house (after almost a year on the market) by dropping the asking price by about $20,000. Why doesn't everyone with a house on the market do this? The answer, I think, is that the housing market is particularly susceptible to the type of "coordination problem" that New Keynesian economists blame for sticky prices in general. I know that the only way to sell my house is to cut the asking price. But I need to high sale price so I can afford to buy another house on the market. If no one else drops his/her price, I won't be able to buy. So I don't cut my price and my house stays unsold. Since everyone is in the same boat, no one cuts his/her price, no one sells his/her house, and sales look as shown in the graph above. Housing is particularly susceptible to this problem because in the majority of cases the seller is also a buyer somewhere else in the market.
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