Working Paper: NBER ID: w15988
Authors: Jack Favilukis; Sydney C. Ludvigson; Stijn Van Nieuwerburgh
Abstract: This paper studies a quantitative general equilibriummodel of the housing market where a large number of overlapping generations of homeowners face both idiosyncratic and aggregate risks but have limited opportunities to insure against these risks due to incomplete financial markets and collateralized borrowing constraints. Interest rates in the model, like housing and equity returns, are determined endogenously from a market clearing condition. The model has two key elements not previously considered in existing quantitative macro studies of housing finance: aggregate business cycle risk, and a realistic wealth distribution driven in the model by bequest heterogeneity in preferences. These features of the model play a crucial role in the following results. First, a relaxation of financing constraints leads to a large boom in house prices. Second, the boom in house prices is entirely the result of a decline in the housing risk premium. Third, low interest rates cannot explain high home values.
Keywords: Housing Market; Macroeconomics; Financial Constraints; Risk Sharing; Wealth Distribution
JEL Codes: E0; E1; E13; E2; E21; E23; E3; E44; G0; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relaxation of financing constraints (G32) | increase in house prices (R31) |
| increase in house prices (R31) | increase in price-marginal utility (PMU) ratio (D11) |
| relaxation of financing constraints (G32) | increase in housing demand (R21) |
| decline in housing risk premium (R31) | increase in house prices (R31) |
| foreign capital inflows (F21) | decline in equilibrium real interest rates (E43) |
| foreign capital inflows (F21) | increased risk premiums on equity and housing markets (G19) |
| low interest rates + relaxation of financing constraints (G21) | high home values (R21) |