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Liquidity Constraints in the U.S. Housing Market

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  • Denis Gorea
  • Virgiliu Midrigan

Abstract

We study the severity of liquidity constraints in the U.S. housing market using a life-cycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or obtain home equity loans. The model reproduces well the distribution of individual-level balance sheets – the fraction of housing, mortgage debt and liquid assets in households' wealth, the fraction of hand-to-mouth homeowners (Kaplan and Violante, 2014), as well as the frequency of housing turnover and home equity extraction in the 2001 data. The model implies that 75% of homeowners are liquidity constrained and willing to pay an average of 8 cents to extract an additional dollar of liquidity from their home. Liquidity constraints imply sizable welfare losses equivalent to a 1.2% permanent reduction in consumption.

Suggested Citation

  • Denis Gorea & Virgiliu Midrigan, 2017. "Liquidity Constraints in the U.S. Housing Market," NBER Working Papers 23345, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23345 Note: EFG ME
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    References listed on IDEAS

    as
    1. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, March.
    2. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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