Credit supply shocks, home purchase volume, and borrowing behavior

We exploit the 2007 private label securitization (PLS) freeze as a quasi‐experiment to study the impact of a negative credit supply shock on home purchases and borrowing behavior. Using a difference‐in‐differences estimator, we show that a negative supply shock to first‐lien mortgages has little impact on the volume of purchases financed with a mortgage, but significantly reduces the average first‐lien loan balance. Much of this reduction in loan balances is the result of increased bunching at the conforming loan limit that is achieved through a combination of greater second mortgage utilization and larger downpayments. Importantly, we find significant heterogeneity in the response to the mortgage supply shock across borrower characteristics and house price levels. Home purchase volume does decline after the shock for less creditworthy borrowers and in expensive locations. The reduction in first‐lien balances is fairly uniform across borrower types, however, the effect is slightly more acute in less expensive areas. Our results suggest that financial market frictions (e.g., downpayment constraints, imperfect credit) play an important role in determining how credit supply shocks impact housing purchases and borrowing behavior.