A Macroeconomic Model of Price Swings in the Housing Market
- (pp. 2036-72)
Abstract
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.Citation
Garriga, Carlos, Rodolfo Manuelli, and Adrian Peralta-Alva. 2019. "A Macroeconomic Model of Price Swings in the Housing Market." American Economic Review, 109 (6): 2036-72. DOI: 10.1257/aer.20140193Additional Materials
JEL Classification
- E44 Financial Markets and the Macroeconomy
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- R31 Housing Supply and Markets