UQO Working Paper No. 19· v1.1· November 2026· 83 pages

The Endogenous Housing Liquidity Premium

Search Frictions, Seller Urgency, and Price Discovery

Real Estate & Urban Economics

On SSRN

The housing liquidity discount is the price of seller urgency: in the illustrative baseline the most urgent seller concedes 6.65 percent of the most patient seller's price, 2.60 percent weighted by transactions.

Halving matching efficiency lowers the transaction-weighted price by 4.8 percent, lengthens the time on market of sales from 2.23 to 3.4 months and raises the urgency discount to 9.0 percent, with housing-service values unchanged. Sale selection moves a price index by at most a fraction 0.090 of the within-type liquidity effect over the admissible region scanned. The paper is theoretical: all magnitudes are illustrative and it claims nothing about any particular market.

Simon-Pierre Boucher — contact@spboucher.ai

Paper PDF (revised)Read online SSRN Code & data repository

6.65%

urgency discount of the most urgent seller relative to the most patient in the illustrative baseline (2.60 percent weighted by transactions); it rises to 9.0 percent when matching efficiency is halved

−4.8%

change in the transaction-weighted price when matching efficiency is halved, in general equilibrium (4.3 percent with tightness fixed); time on market of sales goes from 2.23 to 3.4 months

1.10

elasticity of the effective contact rate with respect to matching efficiency in general equilibrium, against exactly one in partial equilibrium: entry amplifies arrival shocks modestly

≤ 0.090

ratio of the composition (sale-selection) term in a transaction-price index to the within-type liquidity effect, over the admissible region scanned, with the distribution of housing-service values held fixed

1.73%

average premium paid by mortgage buyers over cash buyers in the financing extension under pooled entry, between 1.12 and 2.96 percent depending on the seller's urgency: 0.49 points delay-bargaining, 1.61 outside option, −0.37 selection

4.99%

gap between the search price and the Walrasian free-entry price in the baseline under the stock condition (16.6 percent under the flow condition); the gap changes sign in sufficiently thick markets, so it is not a liquidity-premium benchmark

Abstract

In a continuous-time search model of a local housing market with free entry of buyers, sellers differ in a permanent carrying cost, buyers draw match-specific valuations and prices are Nash-bargained. The urgency discount relative to the most patient seller is nonnegative and increasing in the carrying cost, and expected prices fall by less than reservation prices. Fewer buyer arrivals lower prices, lengthen time on market and widen the discount under an increasing failure rate; with heavy-tailed valuations a more liquid market can lengthen the time on market of sellers who still reject some matches. Liquidity shocks move prices, volume, inventory and durations with housing-service values unchanged, and entry amplifies them. The mortgage–cash gap decomposes into a delay-bargaining term rising with urgency, an outside-option term set by the entry protocol and a selection term that can be negative. Sale selection shifts the composition of transactions in a direction governed by the valuation distribution; over the admissible region scanned, its effect on a price index is at most a fraction 0.090 of the within-type liquidity effect, which no quality adjustment removes. The Walrasian free-entry price is not a liquidity-premium benchmark. No data are used.

JEL: R31, R21, D83, C63, G51

Key Results

A continuous distribution of seller urgency with free entry and a pending financing state

The joint treatment of the three is the paper's stated contribution; the first proposition restates a known comparative static in this setting and is presented as a benchmark.

Urgency discount measured among sellers in the same market

The discount relative to the most patient seller is nonnegative and increasing in the carrying cost, expected prices fall by less than reservation prices, and the discount widens when buyers are scarce if the valuation distribution has an increasing failure rate.

When a more liquid market lengthens time on market

With Pareto valuations a more liquid market lengthens the time on market of every seller whose carrying cost exceeds a threshold that does not depend on the arrival rate, provided the seller still rejects some matches; this is the housing counterpart of a known property of reservation-value search, to which the paper adds the closed-form threshold.

Sign condition for sale selection in price indices

The bias in a transaction-price index depends on whether the product of the hazard function and the mean residual valuation rises or falls: exponential and Pareto valuations make selection amplify measured price changes, light-tailed valuations make it dampen them.

Exact three-term decomposition of the mortgage–cash gap

A delay-bargaining term that rises with the seller's urgency, an outside-option term pinned by the entry protocol rather than by bargaining, and a selection term that is negative for patient sellers; tighter approval and longer delays widen the gap.

The Walrasian price is not a liquidity-premium benchmark

A seller with the option to wait for a high-valuation buyer captures match-specific rents that a uniform price does not, so the search price exceeds the Walrasian free-entry price in sufficiently thick markets; the gap is reported only as a decomposition, under both the stock and the flow version of the free-entry condition.

Quality control

This paper went through a multi-stage quality control: 7 quality-control reports and 92 points checked. The version presented on this page is the revised manuscript. Scores are on a 0–100 scale and are a diagnostic of the manuscript, not an acceptance probability.

Score after revision

74.1/100

65.4 before quality control · +8.7

Quality control dated November 7, 2026

Quality-control decision: major revision
Scientific integrity: PASS
Reproducibility: R0fully reproduced from raw data
Maturity: Asubmission-ready
Quality-control reports: 7
Points checked: 92

Scores by dimension

Before quality controlAfter revision

Originality & contribution62.3 → 63.0
Scientific rigor63.0 → 74.0
Identification & methodology59.4 → 71.0
Data & reproducibility78.6 → 90.0
Robustness & validation63.6 → 74.0
Writing72.0 → 74.0
Figures & tables64.0 → 80.0
Literature positioning70.1 → 78.0

Revised manuscript83 pages14 figures30 tables21 equations144 references33,425 words

What quality control changed

Quality control kept the propositions and tightened what is claimed for them. The urgency discount is now defined at the ends of the carrying-cost support, the sale-selection claim is a bound over a scanned region rather than an order of magnitude, and the paper states which results are known properties restated, which depend on the entry protocol, and which are numerical illustrations.

Urgency discount of the most urgent seller: 5.6% → 6.65 percent of the most patient seller's price (2.60 percent weighted by transactions), defined at the support ends so that it does not depend on the type grid.
Sale selection: effect on a price index ‘an order of magnitude smaller’ than the liquidity effect → at most a fraction 0.090 of the within-type liquidity effect over the admissible region scanned, with housing-service values held fixed.
Heavy-tailed valuations: a more liquid market can lengthen time on market → only for sellers who still reject some matches, and presented as the housing counterpart of a known property of reservation-value search.
Mortgage–cash gap: the 1.61-point outside-option term is now attributed to the pooled-entry protocol rather than to bargaining; under type-specific entry costs the two buyer types coexist only at one value of the cost difference.
Walrasian benchmark: reported under both the stock and the flow version of the free-entry condition (gap of 4.99 and 16.6 percent in the baseline).
Experiments: twelve → fourteen, adding the entry protocol of the financing extension and a frontier scan; every reported equilibrium must satisfy the sellers' participation condition.

Limitations stated in the paper

No data were used: all magnitudes are illustrative, and the paper claims nothing about any particular market.
The model is stationary and local, with exogenous listing inflow, no construction, complete information within a match and a permanent nonnegative carrying cost; the mechanism accounts for discounts of the size measured for motivated and relocated sellers, not for foreclosure discounts.
The coexistence of cash and mortgage buyers rests on the pooled-entry protocol, and a variant with exogenous buyer populations has not been computed; the bound on the composition term is a statement about the admissible region of the present parameterisation.
The welfare results are numerical statements for a steady-state flow criterion (the discounted planner's problem has not been solved), and uniqueness of tightness with heterogeneous sellers is verified numerically, not proved.

Read online (interactive reader)Revised PDF Revised branch on spbgit

Data

Model environment

A continuous-time local housing market: listings arrive at a constant rate and are withdrawn at an exogenous rate, sellers pay a permanent heterogeneous carrying cost, buyers enter freely at a sunk cost, meet listings through a constant-returns matching technology and draw match-specific valuations, and the surplus is split by Nash bargaining. Two extensions add a financing contingency and a posted-price protocol; a dynamic version tracks unanticipated shocks.

Illustrative parameterisation

No moment is estimated and no data are used. Values are chosen so that durations, discounts and dispersion are of the order of magnitude reported in the literature: a listing sells in about two months, a buyer searches for about eleven months, tightness is 4.39 buyers per listing, carrying costs range from 2 to 30 percent of the house value per year, and 90.72 percent of listings eventually sell.

Methodology

Analytical results

Eight propositions and supporting lemmas on seller urgency, the effective arrival rate, free entry and tightness, liquidity shocks, price dispersion, sale selection, the financing contingency and posted prices, with proofs in an appendix.

Numerical solution

The stationary equilibrium, the posted-price and financing variants, a steady-state planner's problem and transition paths are solved for the parameterisation, with every reported equilibrium required to satisfy the sellers' participation condition.

Fourteen documented experiments

Each experiment is documented ex ante with its hypothesis: comparative statics of arrivals, qualification, approval delay, bargaining power, entry costs and seller heterogeneity; transitions after permanent and temporary shocks; index decomposition across four match-value distributions; the entry protocol of the financing extension; posted prices; and a frontier scan and sensitivity analysis.

Validation

Unit tests cover each part of Propositions 1 to 8 and boundary cases, and a regression test regenerates every experiment. A listing-by-listing simulation of 100,000 listings and three seeds agrees with the analytic moments to within 0.39 percent.

Reproducibility

No data are used: every number, table and figure is generated from a single configuration file by the code of the replication repository.

One command runs the fourteen experiments, the Monte Carlo diagnostics, the table and figure generators, the unit and regression tests and the LaTeX build, in about 45 minutes plus 67 minutes for the full regression test on a Mac mini M4 Pro, inside a locked Python environment.

The logged regeneration, its environment record and the per-type Monte Carlo diagnostics are committed with the results, together with a codebook of every result file.

Code is released under the MIT License and the text under CC BY 4.0.

Cite this paper

Boucher, S.-P. (2026). The Endogenous Housing Liquidity Premium. UQO Working Paper No. 19, Université du Québec en Outaouais.

@techreport{boucher2026wp19,
  author      = {Simon-Pierre Boucher},
  title       = {The Endogenous Housing Liquidity Premium},
  institution = {Université du Québec en Outaouais, Département des sciences administratives},
  number      = {19},
  type        = {UQO Working Paper},
  year        = {2026},
  month       = {nov},
  url         = {https://www.spboucher.ai/research/wp19},
}