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Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (Revised Version)

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  • Ortalo-Magné, François
  • Rady, Sven

Abstract

We propose a life-cycle model of the housing market with a property ladder and a credit constraint. We focus on equilibria which replicate the facts that credit constraints delay some households' first home purchase and force other households to buy a home smaller than they would like. The model helps us identify a powerful driver of the housing market: the ability of young households to afford the down payment on a starter home, and in particular their income. The model also highlights a channel whereby changes in income may yield housing price overshooting, with prices of trade-up homes displaying the most volatility, and a positive correlation between housing prices and transactions. This channel relies on the capital gains or losses on starter homes incurred by credit-constrained owners. We provide empirical support for our arguments with evidence from both the U.K. and the U.S.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 494.

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Date of creation: Jan 2005
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Handle: RePEc:lmu:muenec:494

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Keywords: Housing Demand ; Income Fluctuations ; Overlapping Generations ; Collateral Constraint;

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References

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  1. Sven Rady, 1998. "Boom In, Bust Out: Young Households and the Housing Price Cycle," FMG Discussion Papers, Financial Markets Group dp310, Financial Markets Group.
  2. Maria Concetta Chiuri & Tullio Jappelli, 2000. "Financial Market Imperfections and Home Ownership: A Comparative Study," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 44, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Dec 2000.
  3. Venti, Steven F. & Wise, David A., 1991. "Aging and the income value of housing wealth," Journal of Public Economics, Elsevier, Elsevier, vol. 44(3), pages 371-397, April.
  4. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  5. Capozza, Dennis R. & Mack, Charlotte & Hendershott, Patric H. & Mayer, Christopher J., 2002. "The Determinants of House Price Dynamics," ERES, European Real Estate Society (ERES) eres2002_106, European Real Estate Society (ERES).
  6. Englund, P. & Ioannides, Y.M., 1996. "House Price Dynamics: An International Empirical Perspective," Papers, Uppsala - Working Paper Series 1996-01, Uppsala - Working Paper Series.
  7. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 125-37, March.
  8. Steven F. Venti & David A. Wise, 2001. "Aging and Housing Equity: Another Look," NBER Working Papers 8608, National Bureau of Economic Research, Inc.
  9. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, American Economic Association, vol. 87(3), pages 255-69, June.
  10. Barton A. Smith & William P. Tesarek, 1991. "House Prices and Regional Real Estate Cycles: Market Adjustments in Houston," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 19(3), pages 396-416.
  11. Jesus Fernández-Villaverde & Dirk Krueger, 2007. "Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 552-565, August.
  12. Steven F. Venti & David A. Wise, 1990. "But They Don’t Want to Reduce Housing Equity," NBER Chapters, in: Issues in the Economics of Aging, pages 13-32 National Bureau of Economic Research, Inc.
  13. Green, Richard & Hendershott, Patric H., 1996. "Age, housing demand, and real house prices," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 26(5), pages 465-480, August.
  14. David Genesove & Christopher Mayer, . "Loss Aversion and Seller Behavior: Evidence from the Housing Market," Zell/Lurie Center Working Papers 323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  15. Donald R. Haurin & Susan M. Wachter & Patric H. Hendershott, 1995. "Wealth Accumulation and Housing Choices of Young Households: An Exploratory Investigation," NBER Working Papers 5070, National Bureau of Economic Research, Inc.
  16. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(6), pages 1270-92, December.
  17. Williams, Joseph T, 1995. "Pricing Real Assets with Costly Search," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 8(1), pages 55-90.
  18. William C. Wheaton, 1999. "Real Estate "Cycles": Some Fundamentals," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 27(2), pages 209-230.
  19. James A. Berkovec & John L. Goodman, 1996. "Turnover as a Measure of Demand for Existing Homes," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 24(4), pages 421-440.
  20. Andrew Caplin & Sewin Chan & Charles Freeman & Joseph Tracy, 1997. "Housing Partnerships: A New Approach to a Market at a Crossroads," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032430, December.
  21. Ortalo-Magne, Francois & Rady, Sven, 2004. "Housing transactions and macroeconomic fluctuations: a case study of England and Wales," Journal of Housing Economics, Elsevier, Elsevier, vol. 13(4), pages 287-303, December.
  22. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack & Christopher J. Mayer, 2002. "Determinants of Real House Price Dynamics," NBER Working Papers 9262, National Bureau of Economic Research, Inc.
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Cited by:
  1. Benito, Andrew, 2006. "The down-payment constraint and UK housing market: Does the theory fit the facts?," Journal of Housing Economics, Elsevier, Elsevier, vol. 15(1), pages 1-20, March.
  2. Lee, Nai Jia & Ong, Seow Eng, 2005. "Upward mobility, house price volatility, and housing equity," Journal of Housing Economics, Elsevier, Elsevier, vol. 14(2), pages 127-146, June.

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