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Volkswirtschaft - Open Access LMU - Teil 01/03 Podcast
Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (Revised Version)

Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (Revised Version)

Volkswirtschaft - Open Access LMU - Teil 01/03 vor 21 Jahren

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We propose a life-cycle model of the housing market with a property
ladder and a credit constraint. We focus on equilibria which
replicate the facts that credit constraints delay some households'
first home purchase and force other households to buy a home
smaller than they would like. The model helps us identify a
powerful driver of the housing market: the ability of young
households to afford the down payment on a starter home, and in
particular their income. The model also highlights a channel
whereby changes in income may yield housing price overshooting,
with prices of trade-up homes displaying the most volatility, and a
positive correlation between housing prices and transactions. This
channel relies on the capital gains or losses on starter homes
incurred by credit-constrained owners. We provide empirical support
for our arguments with evidence from both the U.K. and the U.S.