New House Premiums, Market Conditions, and the Decision to Purchase a New Versus Existing House

In this paper, we examine how the new house premium has changed over time. We propose that the new home premium can largely be attributed to the “lemons problem” from Akerlof (1970). Recent research suggests that the growth of the Internet has significantly reduced the lemons problem for many produc...

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Bibliographic Details
Published in:The Journal of real estate research 2019-07, Vol.41 (3), p.379-410
Main Authors: Gordon, Bruce L., Winkler, Daniel T.
Format: Article
Language:English
Subjects:
Asymmetric information
Asymmetry
Construction costs
Cost control
Feedback
Houses
Housing prices
Information sharing
Internet
Licenses
Literature reviews
Noise
Premiums
Price indexes
Purchasing
Trends
Used automobiles
Volatility
Willingness to pay
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Summary:In this paper, we examine how the new house premium has changed over time. We propose that the new home premium can largely be attributed to the “lemons problem” from Akerlof (1970). Recent research suggests that the growth of the Internet has significantly reduced the lemons problem for many products. Our results suggest that the new house premium is about 5.6% without considering time-on-the-market (TOM) and has been declining. This premium ranges from 14.6% (1998) to −2.8% (2010). The average new house premium is 13.3% considering TOM, and ranges from 22.5% (1998) to 5.0% (2010). A trend analysis reveals that new house premiums have fallen 0.8%–0.9% annually, consistent with the Internet, information sharing, and reputation feedback mechanisms reducing the lemons problem associated with asymmetric information.
ISSN:0896-5803
2691-1175
DOI:10.22300/0896-5803.41.3.379