Housing, Capital Investment, and Credit Market Imperfections

We study the role of residential housing in financing capital investment in a dynamic stochastic general equilibrium framework. Residential housing, though nonproductive, is shown to be important in determining the cost of external financing for investment on productive capital. Housing stock serves as collaterals in financial contracts for capital investment. We find that fluctuations in the return to capital investment is not enough for accounting the cyclical behavior of external finance premia and bankruptcy rates. Fluctuations of house prices help generate countercyclical external finance premia and bankruptcy rates by a great deal