Do Credit Conditions Move House Prices?

58 Pages Posted: 25 Oct 2021 Last revised: 23 Apr 2022

See all articles by Daniel Greenwald

Daniel Greenwald

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Adam M. Guren

Boston University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 2021

Abstract

To what extent did an expansion and contraction of credit drive the 2000s housing boom and bust? The existing literature lacks consensus, with findings ranging from credit having no effect to credit driving most of the house price cycle. We show that the key difference behind these disparate results is the extent to which credit insensitive agents such as landlords and unconstrained savers absorb credit-driven demand, which depends on the degree of segmentation in housing markets. We develop a model with frictional rental markets that allows us to consider cases in between the extremes of no segmentation and perfect segmentation typically assumed in the literature. We argue that the relative elasticities of the price-rent ratio and homeownership with respect to an identified credit shock is a sufficient statistic to measure the degree of segmentation. We estimate this moment using three different credit supply instruments and use it to calibrate our model. Our results reveal that rental markets are highly frictional and closer to fully segmented, which implies large effects of credit on house prices. In particular, changes to credit standards can explain between 34% and 55% of the rise in price-rent ratios over the boom.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Greenwald, Daniel and Guren, Adam M., Do Credit Conditions Move House Prices? (October 2021). NBER Working Paper No. w29391, Available at SSRN: https://ssrn.com/abstract=3949188

Daniel Greenwald (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Adam M. Guren

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

HOME PAGE: http://people.bu.edu/guren/

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
6
Abstract Views
87
PlumX Metrics