The Macroeconomic E¤ects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium

bond markets calibrated to match the increase in foreign ownership of U.S. Treasury and agency debt from 2000-2007 generates an increase in national price-rent ratios comparable to that observed in U.S. data over this period. Moreover, in a simulated transition for the period 2000-2009, the model generates a decline of greater than 16% in national house price-rent ratios in the two year period 2007 to 2009, driven by the economic contraction and by a presumed reversal of the financial market liberalization. A financial market liberalization drives risk premia in both the housing and equity market down, shifts the composition of wealth for all age and income groups towards housing, and leads to a short-run boom in aggregate consumption but a short-run bust in investment. By contrast, although an influx of foreign capital into the domestic bond market reduces interest rates, it increases risk premia in both the housing and equity markets. Finally, the model implies that procyclical increases in equilibrium price-rent ratios reflect expectations of lower future housing returns, not higher future rents.