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Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy

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Author Info

  • Satyajit Chatterjee
  • Burcu Eyigungor

Abstract

The authors construct a quantitative equilibrium model of the housing market in which an unanticipated increase in the supply of housing triggers default mortgages via its effect on house prices. The decline in house prices creates an incentive to increase the consumption of housing space, but leverage makes it costly for homeowners to sell their homes and buy bigger ones (they must absorb large capital losses). Instead, leveraged households find it advantageous to default and rent housing space. Since renters demand less housing space than homeowners, foreclosures are a negative force affecting house prices. The authors explore the possible effects of the government's foreclosure prevention policy in their model. They find that the policy can temporarily reduce foreclosures and shore up house prices.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-22.

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Date of creation: 2009
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Handle: RePEc:fip:fedpwp:09-22

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Related research

Keywords: Housing ; Default (Finance) ; Foreclosure;

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Cited by:
  1. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," CEPR Discussion Papers 8624, C.E.P.R. Discussion Papers.
  2. Campbell, John Y. & Cocco, João F., 2014. "A model of mortgage default," CFS Working Paper Series 452, Center for Financial Studies (CFS).
  3. Kyle F. Herkenhoff & Lee E. Ohanian, 2011. "Labor Market Dysfunction During the Great Recession," NBER Working Papers 17313, National Bureau of Economic Research, Inc.
  4. Shaofeng Xu, 2013. "An Equilibrium Analysis of the Rise in House Prices and Mortgage Debt," Working Papers 13-9, Bank of Canada.
  5. Tim Landvoigt & Monika Piazzesi & Martin Schneider, 2012. "The Housing Market(s) of San Diego," NBER Working Papers 17723, National Bureau of Economic Research, Inc.
  6. Børsum, Øystein, 2010. "Contagious Mortgage Default," Memorandum 10/2010, Oslo University, Department of Economics.
  7. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
  8. Kyle F. Herkenhoff & Lee Ohanian, 2012. "Foreclosure delay and U.S. unemployment," Working Papers 2012-017, Federal Reserve Bank of St. Louis.
  9. Sommer, Kamila & Sullivan, Paul & Verbrugge, Randal, 2013. "The equilibrium effect of fundamentals on house prices and rents," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 854-870.
  10. Satyajit Chatterjee, 2010. "De-leveraging and the financial accelerator: how Wall Street can shock main street," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 1-8.

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