Financial Constraints and Inflated Home Prices during the Real Estate Boom

Ben-David, Itzhak

doi:10.1257/app.3.3.55

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American Economic Journal: Applied Economics: Vol. 3 No. 3 (July 2011)

AEJ: Applied Volume. 3, Issue 3 | left

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Financial Constraints and Inflated Home Prices during the Real Estate Boom

Article Citation

Ben-David, Itzhak. 2011. "Financial Constraints and Inflated Home Prices during the Real Estate Boom." American Economic Journal: Applied Economics, 3(3): 55-87.

DOI: 10.1257/app.3.3.55

Abstract

During the housing boom, financially constrained home buyers artificially inflated transaction prices in order to draw larger mortgages. Using transaction data from Illinois that includes sellers' offers to inflate prices, I estimate that in 2005-2008, up to 16 percent of highly leveraged transactions had inflated prices of up to 9 percent. Inflated transactions were common in low-income neighborhoods and when intermediaries had a greater stake or an informational advantage. Borrowers who inflated prices were more likely to default, but their mortgage rates were not materially higher. Property prices in areas with a high rate of past price inflation exhibited momentum and high volatility. (JEL D14, E31, R31)

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Authors

Ben-David, Itzhak (OH State U)

JEL Classifications

D14: Personal Finance
E31: Price Level; Inflation; Deflation
R31: Housing Supply and Markets

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