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A Theory of Housing Demand Shocks

Author

Listed:
  • Zheng Liu

    (Federal Reserve Bank of San Francisco)

  • Pengfei Wang

    (Hong Kong University of Science and Technology)

  • Tao Zha

    (Federal Reserve Bank of Atlanta)

Abstract

Housing demand shocks are an important source of housing price fluctuations and, through the collateral channel, they drive macroeconomic fluctuations as well. However, these reduced-form shocks in the standard macro models fail to generate the observed large fluctuations in the housing price-to-rent ratio. We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. Households with high marginal utility of housing face binding credit constraints, giving rise to a liquidity premium in the aggregated housing Euler equation. The liquidity premium drives a wedge between the house price and the average rent and allows credit supply shocks to generate large fluctuations in house prices and the price-to-rent ratio.

Suggested Citation

  • Zheng Liu & Pengfei Wang & Tao Zha, 2019. "A Theory of Housing Demand Shocks," 2019 Meeting Papers 78, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:78
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. A Theory of Housing Demand Shocks
      by Christian Zimmermann in NEP-DGE blog on 2019-10-23 19:41:14

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    Cited by:

    1. J. Scott Davis & Kevin X. D. Huang & Ayse Sapci, 2020. "Imperfect substitution in real estate markets and the effect of housing demand on corporate investment," Vanderbilt University Department of Economics Working Papers 20-00002, Vanderbilt University Department of Economics.
    2. Greg Howard & Jack Liebersohn, . "Regional Divergence and House Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    3. Davis, J. Scott & Huang, Kevin X.D. & Sapci, Ayse, 2022. "Land price dynamics and macroeconomic fluctuations with imperfect substitution in real estate markets," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    4. Ma, Xutao & Zhang, Zhen, 2022. "Expectations, credit conditions, and housing boom-bust: Evidence from SVAR with sign and zero restrictions," Journal of Banking & Finance, Elsevier, vol. 134(C).
    5. Dong, Feng & Xu, Zhiwei, 2022. "Bubbly bailout," Journal of Economic Theory, Elsevier, vol. 202(C).

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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