Financial Constraints and Inflated Home Prices during the Real Estate Boom
AbstractDuring 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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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Journal: Applied Economics.
Volume (Year): 3 (2011)
Issue (Month): 3 (July)
Find related papers by JEL classification:
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
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- Sumit Agarwal & Richard J. Rosen & Vincent Yao, 2013. "Why do borrowers make mortgage refinancing mistakes?," Working Paper Series WP-2013-02, Federal Reserve Bank of Chicago.
- Ben-David, Itzhak, 2011. "High Leverage and Willingness to Pay: Evidence from the Residential Housing Market," Working Paper Series 2011-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
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