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Indebted Sellers, Housing Liquidity and Mortgage Standards - Amy Sun

Date & Time:
January 28, 2015 | 3:00 pm - 4:30 pm
Location:
SS 423
Speaker:
Amy Sun, Queen's University

We develop a tractable dynamic model of housing and lending to study the effect of mortgage debt on house-selling decisions, as well as the impact of housing market liquidity on mortgage standards. Our model features directed search, long-term mortgages and limited commitment. There arise equilibrium default and equilibrium distributions of housing prices and mortgage debt. The model generates endogenous responses of housing prices, market liquidity and mortgage standards upon local income shocks. We calibrate our model to U.S. city-level data. Key findings are: First, seller behavior varies significantly according to one's indebtedness. Consistent with empirical evidence, sellers with high leverage post higher asking prices, wait longer on the market, and generally get to sell at higher prices. Moreover, upon city-level income shocks, the initial responses of house-selling decisions vary qualitatively across households with different levels of indebtedness. Second, housing market liquidity matters for setting mortgage standards. As is observed from data, our model generates negative co-movements between housing prices and down-payment ratios.  We also explore two other alternative settings respectively with frictionless housing markets and directed search with middlemen. These alternatives offer qualitatively different predictions over equilibrium dynamics on many aspects.

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