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The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium

  • Jack Favilukis
  • Sydney C. Ludvigson
  • Stijn Van Nieuwerburgh

This paper studies a quantitative general equilibriummodel of the housing market where a large number of overlapping generations of homeowners face both idiosyncratic and aggregate risks but have limited opportunities to insure against these risks due to incomplete financial markets and collateralized borrowing constraints. Interest rates in the model, like housing and equity returns, are determined endogenously from a market clearing condition. The model has two key elements not previously considered in existing quantitative macro studies of housing finance: aggregate business cycle risk, and a realistic wealth distribution driven in the model by bequest heterogeneity in preferences. These features of the model play a crucial role in the following results. First, a relaxation of financing constraints leads to a large boom in house prices. Second, the boom in house prices is entirely the result of a decline in the housing risk premium. Third, low interest rates cannot explain high home values.

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File URL: http://www.nber.org/papers/w15988.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15988.

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Date of creation: May 2010
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Handle: RePEc:nbr:nberwo:15988
Note: AP EFG ME
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  14. Tomasz Piskorski & Alexei Tchistyi, 2011. "Stochastic House Appreciation and Optimal Mortgage Lending," Review of Financial Studies, Society for Financial Studies, vol. 24(5), pages 1407-1446.
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  16. Eva Carceles-Poveda & Daniele Coen Pirani, 2010. "Owning Capital or Being Shareholders: An Equivalence Result with Incomplete Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 537-558, July.
  17. Chris I. Telmer, 1991. "Asset Pricing Puzzles and Incomplete Markets," Working Papers 806, Queen's University, Department of Economics.
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