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Joint Dynamics of House Prices and Foreclosures

Author

Listed:
  • Yavuz Aslan
  • Bulent Guler
  • Temel Taskin

Abstract

This paper studies the joint transitional dynamics of the foreclosures and house prices in a standard life-cycle incomplete markets model with housing and a realistic long-term mortgage structure. We calibrate our model to match several long term features of the US housing market, and analyze the effects of several unexpected and permanent shocks on the house price and the foreclosure rate both across the steady-states and along the transition between the steady-states. We examine permanent, unexpected shocks to the risk-free interest rate, the minimum down payment ratio, and unemployment. During the transition, these shocks create large movements in house prices. More importantly, the foreclosure dynamics are quite significant along the transition compared to the steady-state changes, and there are strong feedbacks between foreclosures and house prices. We assess the effects of a temporary reduction in the risk-free interest rate, which has moderate effects on house prices but little effect on foreclosure dynamics. We also study the effects of an ex-ante macroprudential policy, which establishes a minimum downpayment requirement at a higher threshold. Such a macroprudential policy helps substantially stabilize both house prices and foreclosures.

Suggested Citation

  • Yavuz Aslan & Bulent Guler & Temel Taskin, 2014. "Joint Dynamics of House Prices and Foreclosures," Working Papers 1440, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  • Handle: RePEc:tcb:wpaper:1440
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    File URL: http://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2014/14-40
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    Cited by:

    1. repec:eee:dyncon:v:87:y:2018:i:c:p:124-151 is not listed on IDEAS
    2. Elenev, Vadim & Landvoigt, Tim & Van Nieuwerburgh, Stijn, 2016. "Phasing out the GSEs," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 111-132.
    3. repec:eee:jmacro:v:56:y:2018:i:c:p:152-171 is not listed on IDEAS
    4. Arteta, Carlos & Kose, Ayhan & Stocker, Marc & Taskin, Temel, 2016. "Negative Interest Rate Policies: Sources and Implications," CEPR Discussion Papers 11433, C.E.P.R. Discussion Papers.
    5. Gete, Pedro & Zecchetto, Franco, 2017. "Distributional Implications of Government Guarantees in Mortgage Markets," MPRA Paper 80643, University Library of Munich, Germany.
    6. Funke, Michael & Kirkby, Robert & Mihaylovski, Petar, 2018. "House prices and macroprudential policy in an estimated DSGE model of New Zealand," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 152-171.
    7. Hedlund, Aaron, 2016. "Illiquidity and its discontents: Trading delays and foreclosures in the housing market," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 1-13.
    8. Dean Corbae & Erwan Quintin, 2015. "Leverage and the Foreclosure Crisis," Journal of Political Economy, University of Chicago Press, vol. 123(1), pages 1-65.
    9. Bulent Guler, 2015. "Innovations in Information Technology and the Mortgage Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 456-483, July.
    10. Michael Funke & Rongrong Sun & Linxu Zhu, "undated". "The Credit Risk of Chinese Households – A Micro-Level Assessment," CFDS Discussion Paper Series 2018/3, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    11. Mnasri, A., 2015. "Renting vs buying a home: A matter of wealth accumulation or of geographic stability?," Journal of Economic Dynamics and Control, Elsevier, vol. 60(C), pages 42-72.
    12. Dietsch, Michel & Petey, Joël, 2015. "The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans," Journal of Housing Economics, Elsevier, vol. 28(C), pages 103-120.
    13. repec:eee:jmacro:v:55:y:2018:i:c:p:235-252 is not listed on IDEAS
    14. Funke, Michael & Tsang, Andrew & Zhu, Linxu, 2018. "Not all cities are alike : House price heterogeneity and the design of macro-prudential policies in China," BOFIT Discussion Papers 18/2018, Bank of Finland, Institute for Economies in Transition.
    15. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, Elsevier.
    16. Aaron Hedlund, 2015. "Failure to Launch: Housing, Debt Overhang, and the Inflation Option During the Great Recession," Working Papers 1515, Department of Economics, University of Missouri.
    17. Silvo, Aino, 2017. "House prices, lending standards, and the macroeconomy," Research Discussion Papers 4/2017, Bank of Finland.

    More about this item

    Keywords

    Housing; House price; Interest rate; Mortgage contract; Mortgage default; Home equity;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G01 - Financial Economics - - General - - - Financial Crises
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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