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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. 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.
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  8. Amir E. Khandani & Andrew W. Lo & Robert C. Merton, 2009. "Systemic Risk and the Refinancing Ratchet Effect," NBER Working Papers 15362, National Bureau of Economic Research, Inc.
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  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.
  12. Edward L. Glaeser & Joshua D. Gottlieb & Joseph Gyourko, 2010. "Can Cheap Credit Explain the Housing Boom?," NBER Working Papers 16230, National Bureau of Economic Research, Inc.
  13. Annamaria Lusardi & Daniel J. Schneider & Peter Tufano, 2011. "Financially Fragile Households: Evidence and Implications," NBER Working Papers 17072, National Bureau of Economic Research, Inc.
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  16. 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, vol. 33(4), pages 681-710, December.
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Citations

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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. Philip Arestis & Ana Rosa González, 2014. "The Housing Market-Bank Credit Relationship: Some Thoughts on Its Causality," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 145-160, March.
  3. Bover, Olympia & Casado, Jose Maria & Costa, Sonia & Du Caju, Philip & McCarthy, Yvonne & Sierminska, Eva & Tzamourani, Panagiota & Villanueva, Ernesto & Zavadil, Tibor, 2014. "The distribution of debt across euro area countries: The role of individual characteristics, institutions and credit conditions," Discussion Papers 01/2014, Deutsche Bundesbank, Research Centre.
  4. 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.).
  5. Jack Favilukis & David Kohn & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2012. "International Capital Flows and House Prices: Theory and Evidence," NBER Chapters, in: Housing and the Financial Crisis, pages 235-299 National Bureau of Economic Research, Inc.
  6. Philip Arestis & Ana Rosa Gonzalez, 2013. "Endogenous Bank Credit and Its Link to Housing in OECD Countries," Economics Working Paper Archive wp_750, Levy Economics Institute.
  7. Michael Kumhof & Romain Ranciere & Pablo Winant, 2013. "Inequality, Leverage and Crises: The Case of Endogenous Default," IMF Working Papers 13/249, International Monetary Fund.
  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. Landier, Augustin & Sraer, David & Thesmar, David, 2013. "Banking Deregulation and The Rise in House Price Comovement," TSE Working Papers 13-437, Toulouse School of Economics (TSE).
  10. KURASHIMA Daichi & MIZUNAGA Masashi & ODAKI Kazuhiko & WATANABE Wako, 2013. "Is Leverage a Determinant of Asset Price? Evidence from real estate transaction data," Discussion papers 13082, Research Institute of Economy, Trade and Industry (RIETI).
  11. Andreas Fuster & James Vickery, 2013. "Securitization and the fixed-rate mortgage," Staff Reports 594, Federal Reserve Bank of New York.

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