Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints*
We propose a life-cycle model of the housing market with a property ladder and a credit constraint. We focus on equilibria that replicate the facts that credit constraints delay some households' first home purchase and force other households to buy a home smaller than they would like. The model helps us identify a powerful driver of the housing market: the ability of young households to afford the down payment on a starter home, and in particular their income. The model also highlights a channel whereby changes in income may yield housing price overreaction, with prices of trade-up homes displaying the most volatility, and a positive correlation between housing prices and transactions. This channel relies on the capital gains or losses on starter homes incurred by credit-constrained owners. We provide empirical support for our arguments with evidence from both the U.K. and the U.S. Copyright 2006 The Review of Economic Studies Limited.
Year of publication: |
2006
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Authors: | ORTALO-MAGNÉ, FRANÇOIS ; RADY, SVEN |
Published in: |
Review of Economic Studies. - Wiley Blackwell, ISSN 0034-6527. - Vol. 73.2006, 2, p. 459-485
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Publisher: |
Wiley Blackwell |
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