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)
"Financial Constraints and Inflated Home Prices during the Real Estate Boom." American Economic Journal: Applied Economics,
Price Level; Inflation; Deflation
Housing Supply and Markets