Leverage and House-Price Dynamics in U.S. Cities

We use city-level data to analyze the relationship between homeowner borrowing patterns and house-price dynamics. Our principal finding is that in cities where a greater fraction of homeowners are highly leveraged-- i.e., have high loan-to-value ratios--house prices react more sensitively to city-specific shocks, such as changes in per-capita income. This finding is consistent with recent theories that emphasize the role of borrowing in shaping the behavior of asset prices.