Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints
AbstractThis paper presents a first step towards a new theory of housing market fluctuations. We develop a life-cycle model where agents face credit constraints and their housing consumption is restricted to a discrete set of possibilities. The market interaction of young credit constrained agents climbing the property ladder with old agents trading down, generates co-movements of aggregate house prices, volume of transactions and income, consistent with the patterns observed in the U.S. and the U.K. Under plausible assumptions, the model reproduces the slight lead of transaction volume over the other two series as documented in the data. Our theory asserts that the fluctuations in housing prices depend crucially on fluctuations in the current income of young households (the first-time buyers). Thus, it sheds light on why housing prices are more volatile than GDP, and why they exhibit some degree of predictability in a market where households optimize over the timing of their transactions.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 9810003.
Length: 36 pages
Date of creation: 22 Oct 1998
Date of revision:
Note: Type of Document - Acrobat PDF; prepared on PC; pages: 36 ; figures: included
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Housing Demand; Income Fluctuations; Overlapping Generations; Collateral Constraint;
Other versions of this item:
- Sven Rady, 1998. "Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints," FMG Discussion Papers dp296, Financial Markets Group.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
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