Working Paper: NBER ID: w17832
Authors: Manuel Adelino; Antoinette Schoar; Felipe Severino
Abstract: We show that easier access to credit significantly increases house prices by using exogenous changes in the conforming loan limit as an instrument for lower cost of financing. Houses that become eligible for financing with a conforming loan show an increase in house value of 1.16 dollars per square foot (for an average price per square foot of 220 dollars) and higher overall house prices controlling for a rich set of house characteristics. However, these estimated coefficients are consistent with a local elasticity of house prices to interest rates that is lower than some previous studies proposed (below 10). In addition, loan to value ratios around the conforming loan limit deviate significantly from the common 80 percent norm, which confirms that it is an important factor in the financing choices of home buyers. In line with our interpretation, the results are stronger in the first half of our sample (1998-2001) when the conforming loan limit was more important, given that other forms of financing were less common and substantially more expensive. Results are also stronger in zip codes where personal income growth is low or declining, and in regions with lower elasticity of housing supply.
Keywords: Credit Supply; House Prices; Mortgage Market Segmentation
JEL Codes: D12; G10; R20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in mortgage rates (G21) | increase in house prices (R31) |
| lower income growth (F62) | stronger impact of credit supply on house prices (E51) |
| less elastic housing supply (R31) | stronger impact of credit supply on house prices (E51) |
| increase in conforming loan limit (CLL) (G21) | increase in house prices (R31) |
| increase in conforming loan limit (CLL) (G21) | easier access to credit (G21) |
| easier access to credit (G21) | increase in house prices (R31) |
| increase in credit supply (E51) | increase in house prices (R31) |