A Macroeconomic Model of Price Swings in the Housing Market

A Macroeconomic Model of Price Swings in the Housing Market

This paper shows that a macro model with segmented financial markets can generate sizable movements in housing prices in response to changes in credit conditions. We establish theoretically that reductions in mortgage rates always have a positive effect on prices, whereas the relaxation of loan-to-value constraints has ambiguous effects. A quantitative version of the model under perfect foresight accounts for about one-half of the observed price increase in the United States in the 2000s. When we include shocks to expectations about housing finance conditions, the model’s ability to match house values improves significantly. The framework reconciles the observed disconnect between house prices and rents since, in general equilibrium, financial shocks can decrease rents and increase prices.

Carlos Garriga, Rodolfo Manuelli, and Adrian Peralta-Alva

American Economic Review

May 2019

I didn't find this helpful.This was helpful. Please let us know if you found this article helpful.
By |2019-06-04T13:23:13-07:00June 4th, 2019|Efficiency/Growth, Financial Regulation, Mortgage Finance, Reference|