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Credit Supply and House Prices: Evidence from Mortgage Market Segmentation

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  • Manuel Adelino
  • Antoinette Schoar
  • Felipe Severino

Abstract

We show that easier access to credit significantly increases house prices by using exogenous changes in the conforming loan limit as an instrument for lower cost of financing. Houses that become eligible for financing with a conforming loan show an increase in house value of 1.16 dollars per square foot (for an average price per square foot of 220 dollars) and higher overall house prices controlling for a rich set of house characteristics. However, these estimated coefficients are consistent with a local elasticity of house prices to interest rates that is lower than some previous studies proposed (below 10). In addition, loan to value ratios around the conforming loan limit deviate significantly from the common 80 percent norm, which confirms that it is an important factor in the financing choices of home buyers. In line with our interpretation, the results are stronger in the first half of our sample (1998-2001) when the conforming loan limit was more important, given that other forms of financing were less common and substantially more expensive. Results are also stronger in zip codes where personal income growth is low or declining, and in regions with lower elasticity of housing supply.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17832.

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Date of creation: Feb 2012
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Handle: RePEc:nbr:nberwo:17832

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  1. Edward L. Glaeser & Joshua D. Gottlieb & Joseph Gyourko, 2012. "Can Cheap Credit Explain the Housing Boom?," NBER Chapters, National Bureau of Economic Research, Inc, in: Housing and the Financial Crisis, pages 301-359 National Bureau of Economic Research, Inc.
  2. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44, pages 367-384, 03.
  3. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(4), pages 1449-1496, November.
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  7. Amir E. Khandani & Andrew W. Lo & Robert C. Merton, 2009. "Systemic Risk and the Refinancing Ratchet Effect," Harvard Business School Working Papers, Harvard Business School 10-023, Harvard Business School, revised Jul 2010.
  8. Chris Downing & Richard Stanton & Nancy Wallace, 2005. "An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 33(4), pages 681-710, December.
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  10. Annamaria Lusardi & Daniel J. Schneider & Peter Tufano, 2011. "Financially Fragile Households: Evidence and Implications," NBER Working Papers 17072, National Bureau of Economic Research, Inc.
  11. Jack Favilukis & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2010. "The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium," NBER Working Papers 15988, National Bureau of Economic Research, Inc.
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  13. Brent W. Ambrose & Michael LaCour-Little & Anthony B. Sanders, 2004. "The Effect of Conforming Loan Status on Mortgage Yield Spreads: A Loan Level Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 32(4), pages 541-569, December.
  14. Annamaria Lusardi & Daniel Schneider & Peter Tufano, 2011. "Financially Fragile Households: Evidence and Implications," CeRP Working Papers 116, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  15. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, American Economic Association, vol. 101(5), pages 2108-31, August.
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Cited by:
  1. Immo Schott, 2013. "Startups, Credit, and the Jobless Recovery," 2013 Meeting Papers, Society for Economic Dynamics 340, Society for Economic Dynamics.
  2. Olympia Bover & Jose Maria Casado & Sonia Costa & Philip Du Caju & Yvonne McCarthy & Eva Sierminska & Panagiota Tzamourani & Ernesto Villanueva & Tibor Zavadil, 2013. "The distribution of debt across euro area countries: The role of individual characteristics, institutions and credit conditions," Working Paper Research, National Bank of Belgium 252, National Bank of Belgium.
  3. Andreas Fuster & James Vickery, 2013. "Securitization and the fixed-rate mortgage," Staff Reports, Federal Reserve Bank of New York 594, Federal Reserve Bank of New York.
  4. Michael Kumhof & Romain Ranciere & Pablo Winant, 2013. "Inequality, Leverage and Crises: The Case of Endogenous Default," IMF Working Papers, International Monetary Fund 13/249, International Monetary Fund.
  5. Alex Kaufman, 2012. "The influence of Fannie and Freddie on mortgage loan terms," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-33, Board of Governors of the Federal Reserve System (U.S.).
  6. Philip Arestis & Ana Rosa González, 2014. "The Housing Market-Bank Credit Relationship: Some Thoughts on Its Causality," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 145-160, March.
  7. KURASHIMA Daichi & MIZUNAGA Masashi & ODAKI Kazuhiko & WATANABE Wako, 2013. "Is Leverage a Determinant of Asset Price? Evidence from real estate transaction data," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 13082, Research Institute of Economy, Trade and Industry (RIETI).
  8. Christoph Basten & Cathérine Koch, 2014. "The causal effect of house prices on mortgage demand and mortgage supply," ECON - Working Papers, Department of Economics - University of Zurich 140, Department of Economics - University of Zurich.
  9. Philip Arestis & Ana Rosa Gonzalez, 2013. "Endogenous Bank Credit and Its Link to Housing in OECD Countries," Economics Working Paper Archive, Levy Economics Institute wp_750, Levy Economics Institute.
  10. Jack Favilukis & David Kohn & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2012. "International Capital Flows and House Prices: Theory and Evidence," NBER Working Papers 17751, National Bureau of Economic Research, Inc.
  11. Landier, Augustin & Sraer, David & Thesmar, David, 2013. "Banking Deregulation and The Rise in House Price Comovement," TSE Working Papers, Toulouse School of Economics (TSE) 13-437, Toulouse School of Economics (TSE).

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