Working Paper: CEPR ID: DP10866
Authors: Amine Ouazad; Romain Rancière
Abstract: Structural models of housing or product choice use observed demand to estimate household preferences. However, household demand may be partly determined by borrowing constraints, limiting households? choice set. Such borrowing constraints will differ across locations, households, and years. We put forward a model of neighborhood choice with borrowing constraints that accounts for mortgage credit approval rates. We estimate the model's parameters using micro-level data on households, property transactions and mortgage applications for the San Francisco Bay. Approval rates vary significantly both across households and across neighborhoods. The model with borrowing constraints yields significantly higher estimated willingness to pay to live close to good schools and in majority-white neighborhoods. The model provides general equilibrium estimates of the impact of a relaxation of lending standards. Between 2000 and 2006, the model provides two out-of-sample predictions: (i) a compression of the price distribution and (ii) a decline in black households' exposure to white households. Both predictions are supported by empirical observation.
Keywords: demand estimation; house prices; housing; mortgage credit; segregation
JEL Codes: G21; R21; R23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| borrowing constraints (F34) | household preferences (D12) |
| borrowing constraints (F34) | housing demand (R21) |
| mortgage origination constraints (G21) | household sensitivity to price changes (D11) |
| relaxation of lending standards (G21) | price distribution compression (D39) |
| relaxation of lending standards (G21) | black households' exposure to neighborhoods (R20) |
| changes in lending standards (G21) | mortgage approval probabilities (G21) |
| mortgage approval probabilities (G21) | household demand (R22) |