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Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints

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Author Info

  • Francois Ortalo-Magne

    (London School of Economics)

  • Sven Rady

    (Graduate School of Business, Stanford University)

Abstract

This 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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File URL: http://128.118.178.162/eps/fin/papers/9810/9810003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 9810003.

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Length: 36 pages
Date of creation: 22 Oct 1998
Date of revision:
Handle: RePEc:wpa:wuwpfi:9810003

Note: Type of Document - Acrobat PDF; prepared on PC; pages: 36 ; figures: included
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Web page: http://128.118.178.162

Related research

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

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