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House Prices and Credit Constraints: Making Sense of the US Experience

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  • John V. Duca
  • John Muellbauer
  • Anthony Murphy

Abstract

Most US house price models break down in the mid-2000's, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions - the cyclically adjusted loan-to-value ratio for first time buyers - into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 121 (2011)
Issue (Month): 552 (05)
Pages: 533-551

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Handle: RePEc:ecj:econjl:v:121:y:2011:i:552:p:533-551

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References

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  1. François Ortalo-Magné & Sven Rady, 2002. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," Wisconsin-Madison CULER working papers 02-01, University of Wisconsin Center for Urban Land Economic Research.
  2. John V. Duca & Tao Wu, 2009. "Regulation and the Neo-Wicksellian Approach to Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 799-807, 06.
  3. Cunningham, Christopher R. & Engelhardt, Gary V., 2008. "Housing capital-gains taxation and homeowner mobility: Evidence from the Taxpayer Relief Act of 1997," Journal of Urban Economics, Elsevier, vol. 63(3), pages 803-815, May.
  4. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  5. Cameron, Gavin & Muellbauer, John & Murphy, Anthony, 2006. "Was There a British House Price Bubble? Evidence from a Regional Panel," CEPR Discussion Papers 5619, C.E.P.R. Discussion Papers.
  6. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
  7. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, vol. 6(4), pages 203-217, December.
  8. Morris A. Davis & Jonathan Heathcote, 2004. "The price and quantity of residential land in the United States," Finance and Economics Discussion Series 2004-37, Board of Governors of the Federal Reserve System (U.S.).
  9. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  10. Karl E. Case & Robert J. Shiller, 1990. "Forecasting Prices and Excess Returns in the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(3), pages 253-273.
  11. John V. Duca, 2006. "Making sense of the U.S. housing slowdown," Economic Letter, Federal Reserve Bank of Dallas, vol. 1(nov).
  12. Mark Doms & John Krainer, 2007. "Innovations in mortgage markets and increased spending on housing," Working Paper Series 2007-05, Federal Reserve Bank of San Francisco.
  13. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  14. Danielle DiMartino & John V. Duca, 2007. "The rise and fall of subprime mortgages," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(nov).
  15. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta.
  16. Duca, John V., 1996. "Deposit Deregulation and the Sensitivity of Housing," Journal of Housing Economics, Elsevier, vol. 5(3), pages 207-226, September.
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