Working Paper: NBER ID: w10611
Authors: Jacob L. Vigdor
Abstract: This paper employs a simple intertemporal model to show that presence of liquidity constraints can depress the price of a durable good below its net present rental value, regardless of the overall supply elasticity. The existence of price effects implies that the relaxation of liquidity constraints is not Pareto improving, and may in fact be regressive. Historical evidence, which exploits the fact that a clearly identifiable group, war veterans, enjoyed the most favored access to mortgage credit in the postwar era, supports the model. The results suggest that more recent mortgage market innovations have served primarily to increase prices rather than home ownership rates, and that such innovations have the potential to exacerbate socioeconomic disparities in ownership rates.
Keywords: liquidity constraints; housing prices; VA mortgage program; home ownership
JEL Codes: D91; E21; G21; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liquidity constraints (E51) | Depressed housing prices (R31) |
| Relaxation of liquidity constraints (G59) | Significant price increases for durable goods (L68) |
| Mortgage market innovations (G21) | Increased housing prices (R31) |
| Relaxation of liquidity constraints (G59) | Exacerbation of socioeconomic disparities (I14) |
| VA mortgage program (G51) | Increase in housing values relative to rents (R21) |
| VA mortgage program (G51) | Significant increase in home ownership among eligible veterans (R21) |