Cloé Garnache (University of Oslo, ETH Zürich): "Sticky Asset Prices"

(with Martin Schmalz and Dagmar Sommervoll)

We exploit an unexpected, geographically confined, and persistent increase in residential electricity prices to test whether real estate prices adjust quickly to their new fundamental value or whether they are downward sticky. We find that home prices in treated areas fall by 4.0-6.7% following the shock compared to controls, while sales volume declines by 5.7-10.0%. The drop in volume is driven by fewer listings, longer time-on-market, and increased unsold inventory-patterns consistent with downward price rigidity. We show that owners of houses whose market price falls below the outstanding mortgage and those who would realize a nominal loss are significantly less likely to sell and are more reluctant to lower prices. We conclude that housing prices are sticky, and discuss implications for macro models and for household mobility.