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Housing and Liquidity

  • Yu Zhu

    (Wisconsin)

  • Randall Wright

    (U Wisconsin)

  • Chao He

    (University of Wisconsin-Madison)

Registered author(s):

We study economies where houses, in addition to providing utility as shelter, may also facilitate credit transactions, since home equity can be used as collateral. We document there were big increases in home-equity-backed consumption loans coinciding with the start of the house price boom, and suggest an explanation. When it can be used as collateral, housing can bear a liquidity premium. Since liquidity is endogenous, even when fundamentals are constant and agents fully rational house prices can display complicated equilibrium paths resembling bubbles. Our framework is tractable, with exogenous or with endogenous supply, yet captures several salient features of housing markets. The effects of monetary policy are also discussed.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 94.

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Date of creation: 2012
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Handle: RePEc:red:sed012:94
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