Foreclosures and House Prices
The empirical evidence from the last decade suggests that sizeable increases in housing defaults can be the result of either income shocks (recession 2001) or changes in the market value of the house (2005-2007 period). The objective of this paper is to understand the double feedback mechanism between foreclosures and house prices. To understand the importance of this channel we develop an equilibrium theory of housing default. Housing investment requires a downpayment and long-term mortgage financing. However, at any point in time homeowners can default in their obligations, but they loose the property. The stationary version of the model is capable of generating house price increases that are consistent with the average capital gains realized between 1990 and 2005. The model can also rationalize declines in house prices that are consistent with the observed counterpart. The baseline model also replicates the observed decline in the user cost of housing defined as the ratio between the price index for rental property and owner-occupied housing that models based on arbitrage conditions are incapable of replicating.
|Date of creation:||2008|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:red:sed008:878. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.