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Illiquidity and its discontents: Trading delays and foreclosures in the housing market

Listed author(s):
  • Hedlund, Aaron
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    The macroeconomic effects of housing illiquidity are analyzed using a novel directed search model of housing with long-term debt and default. Debt overhang emerges when highly leveraged sellers are forced to post high prices that produce long selling delays. These delays increase foreclosures, raise default premia, and curtail credit. Cheaper credit fuels temporarily higher house prices, faster sales, and fewer foreclosures, but the borrowing surge facilitates future debt overhang and default. More stringent foreclosure punishments also expand credit and, therefore, either generate higher foreclosures or more debt overhang. Leverage caps avoid this conundrum but reduce welfare by restricting borrowing.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304393216300770
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    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 83 (2016)
    Issue (Month): C ()
    Pages: 1-13

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    Handle: RePEc:eee:moneco:v:83:y:2016:i:c:p:1-13
    DOI: 10.1016/j.jmoneco.2016.08.005
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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