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Interest Rate Fluctuations and Equilibrium in the Housing Market

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  • Yavuz Arslan
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    Abstract

    I study the general equilibrium of the housing market in an economy populated by over-lapping generations of households. A contribution of the present paper is to solve for the housing market equilibrium in the presence of aggregate (interest rate) uncertainty with a realistic mortgage contract. In addition, households also face idiosyncratic uncertainty resulting from stochastic changes over the lifecycle in tastes (or need) for housing. In this environment, profit-maximizing banks offer fixed-rate mortgage (FRM) contracts to homebuyers. As seems plausible, each housing market transaction is subject to a fixed cost, which gives rise to S-s policy rules for housing transactions : existing homeowners change the size of their houses only if there is a sufficiently large change in the state of the economy (i.e., in interest rates, in their taste for housing, etc.). A plausibly calibrated version of the model is consistent with three empirically documented features of the housing market : (i) highly volatile housing prices and transaction volume, (ii) a strong positive correlation between transaction volume and housing prices, and (iii) a signi?cant negative relationship between interest rates and housing prices, which can rationalize a large part of the recent boom in housing prices in the U.S. and around the world.

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    File URL: http://www.tcmb.gov.tr/research/teblig/abstract/wp1343_eng.php
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    Bibliographic Info

    Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1343.

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    Date of creation: 2013
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    Handle: RePEc:tcb:wpaper:1343

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    Keywords: House prices; Interest rates; Mortgage contracts;

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    Cited by:
    1. H. Cagri Akkoyun & Yavuz Arslan & Birol Kanik, 2012. "Housing Prices and Transaction Volume," Working Papers, Research and Monetary Policy Department, Central Bank of the Republic of Turkey 1211, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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