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A quantitative analysis of the U.S. housing and mortgage markets and the foreclosure crisis

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  • Satyajit Chatterjee
  • Burcu Eyigungor

Abstract

The authors construct a quantitative equilibrium model of the housing sector that accounts for the homeownership rate, the average foreclosure rate, and the distribution of home-equity ratios across homeowners prior to the recent boom and bust in the housing market. They analyze the key mechanisms that account for these facts, including the preferential tax treatment of housing and in ation. The authors then use the model to gain a deeper understanding of the recent housing and mortgage crisis by studying the consequence of an unanticipated increase in the supply of housing (overbuilding shock). They show that the model can account for the observed decline in house prices and much of the increase in the foreclosure rate if two additional forces are taken into account: (i) the lengthening of the time to complete a foreclosure (during which a defaulter can stay rent-free in his house) and (ii) the tightening of credit constraints in the market for new mortgages.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-26.

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Date of creation: 2011
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Handle: RePEc:fip:fedpwp:11-26

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Related research

Keywords: Foreclosure ; Global financial crisis ; Mortgage loans;

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References

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  1. Cristina Arellano & Narayana R. Kocherlakota, 2008. "Internal Debt Crises and Sovereign Defaults," NBER Working Papers 13794, National Bureau of Economic Research, Inc.
  2. Christopher L. Foote & Kristopher S. Gerardi & Lorenz Goette & Paul S. Willen, 2009. "Reducing foreclosures," Public Policy Discussion Paper, Federal Reserve Bank of Boston 09-2, Federal Reserve Bank of Boston.
  3. Roger G. Ibbotson & Peng Chen, 2003. "Long-Run Stock Returns: Participating in the Real Economy," Yale School of Management Working Papers, Yale School of Management ysm354, Yale School of Management.
  4. Matteo Iacoviello & Marina Pavan, 2011. "Housing and Debt over the Life Cycle and over the Business Cycle," Working Papers, Economics Department, Universitat Jaume I, Castellón (Spain) 2011/04, Economics Department, Universitat Jaume I, Castellón (Spain).
  5. Ortalo-Magné, François & Rady, Sven, 2005. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraint," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 50, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  6. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2007. "A quantitative theory of unsecured consumer credit with risk of default," Working Papers, Federal Reserve Bank of Philadelphia 07-16, Federal Reserve Bank of Philadelphia.
  7. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8624, C.E.P.R. Discussion Papers.
  8. Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2009. "Accounting For Changes In The Homeownership Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 677-726, 08.
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  10. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Consumption and Risk Sharing Over the Life Cycle," Seminar Papers, Stockholm University, Institute for International Economic Studies 702, Stockholm University, Institute for International Economic Studies.
  11. Satyajit Chatterjee & Burcu Eyigungor, 2009. "Maturity, indebtedness, and default risk," Working Papers, Federal Reserve Bank of Philadelphia 09-2, Federal Reserve Bank of Philadelphia.
  12. Morris Davis & Jonathan Heathcote, 2004. "Housing and the business cycle," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-11, Board of Governors of the Federal Reserve System (U.S.).
  13. Joseph Gruber & Robert Martin, 2003. "Precautionary savings and the wealth distribution with illiquid durables," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 773, Board of Governors of the Federal Reserve System (U.S.).
  14. James D. Shilling & John D. Benjamin & C.F. Sirmans, 1990. "Estimating Net Realizable Value for Distressed Real Estate," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 5(1), pages 129-140.
  15. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers, Federal Reserve Bank of Philadelphia 10-11, Federal Reserve Bank of Philadelphia.
  16. James E Mcnulty, 2009. "The Long-run Demand for Housing, the Housing Glut, and the Implications for the Financial Crisis," Business Economics, Palgrave Macmillan, Palgrave Macmillan, vol. 44(4), pages 206-215, October.
  17. José-Víctor Ríos-Rull & Virginia Sánchez-Marcos, 2008. "An Aggregate Economy with Different Size Houses," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(2-3), pages 705-714, 04-05.
  18. Antonia Díaz & María José Luengo-Prado, 2010. "The Wealth Distribution With Durable Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 143-170, 02.
  19. Bulent Guler, 2010. "Innovations in Information Technology and the Mortgage Market," 2010 Meeting Papers, Society for Economic Dynamics 856, Society for Economic Dynamics.
  20. Fran�ois Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," Review of Economic Studies, Oxford University Press, Oxford University Press, vol. 73(2), pages 459-485.
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Citations

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Cited by:
  1. Fatih Guvenen, 2011. "Macroeconomics With Heterogeneity: A Practical Guide," NBER Working Papers 17622, National Bureau of Economic Research, Inc.
  2. Jonathan Halket & Santhanagopalan Vasudev, 2013. "Online Appendix to "Saving Up or Settling Down: Home Ownership over the Life Cycle," Technical Appendices, Review of Economic Dynamics 12-89, Review of Economic Dynamics.
  3. Garriga, Carlos & Kydland, Finn E. & Šustek, Roman, 2013. "Mortgages and monetary policy," Working Papers, Federal Reserve Bank of St. Louis 2013-37, Federal Reserve Bank of St. Louis.
  4. Steven Laufer, 2013. "Equity extraction and mortgage default," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-30, Board of Governors of the Federal Reserve System (U.S.).
  5. Kyle F. Herkenhoff & Lee Ohanian, 2012. "Foreclosure delay and U.S. unemployment," Working Papers, Federal Reserve Bank of St. Louis 2012-017, Federal Reserve Bank of St. Louis.
  6. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS

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