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Housing Demand During the Boom: The Role of Expectations and Credit Constraints

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  • Tim Landvoigt

Abstract

I use a life-cycle model of housing demand to infer expectations about house prices and home equity requirements for the housing boom of the 2000s from observed household choices. Expectations and credit constraints are separately identified from the intensive and extensive margins of housing demand. The main results are that (1) expected price growth was close to average long-run growth, (2) home equity requirements were lax initially, but tightened after the bust, and (3) subjective uncertainty about future price growth was large. Given the option to default on mortgage debt, greater price uncertainty leads to higher optimal household leverage.

Suggested Citation

  • Tim Landvoigt, 2017. "Housing Demand During the Boom: The Role of Expectations and Credit Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 1865-1902.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:6:p:1865-1902.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx026
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    Citations

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    Cited by:

    1. Theresa Kuchler & Monika Piazzesi & Johannes Stroebel, 2022. "Housing Market Expectations," CESifo Working Paper Series 9665, CESifo.
    2. Griffin, John M. & Kruger, Samuel & Maturana, Gonzalo, 2021. "What drove the 2003–2006 house price boom and subsequent collapse? Disentangling competing explanations," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1007-1035.
    3. Stefano Corradin & Carles Vergara-Alert & Jose Fillat, 2019. "Household Choices with House Value Misperception," 2019 Meeting Papers 1247, Society for Economic Dynamics.
    4. Carlos Garriga & Aaron Hedlund, 2019. "Crises in the Housing Market: Causes, Consequences, and Policy Lessons," Working Papers 2019-33, Federal Reserve Bank of St. Louis.
    5. Mavropoulos, Antonios & Xiong, Qizhou, 2019. "Housing consumption and macroprudential policies in Europe: An ex ante evaluation," IWH Discussion Papers 17/2018, Halle Institute for Economic Research (IWH), revised 2019.
    6. Itzhak Ben-David & Pascal Towbin & Sebastian Weber, 2019. "Inferring Expectations from Observables: Evidence from the Housing Market," NBER Working Papers 25702, National Bureau of Economic Research, Inc.
    7. Alexander Ludwig & Jochen Mankart & Jorge Quintana & Mirko Wiederholt & Nathanael Vellekoop, 2019. "House Price Expectations and Housing Choice," 2019 Meeting Papers 848, Society for Economic Dynamics.
    8. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2024. "Housing, Distribution, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(5), pages 981-1020, August.
    9. Rooj, Debasis & Banerjee, Anurag & Sengupta, Reshmi, 2024. "Impact of macroprudential policies on house price expectations- evidence from survey data," Economics Letters, Elsevier, vol. 236(C).
    10. Greg Kaplan & Kurt Mitman & Giovanni L. Violante, 2020. "The Housing Boom and Bust: Model Meets Evidence," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3285-3345.
    11. Chris Bloor & Bruce Lu, 2019. "Have the LVR restrictions improved the resilience of the banking system?," Reserve Bank of New Zealand Analytical Notes series AN2019/07, Reserve Bank of New Zealand.
    12. Matteo Benetton & Philippe Bracke & João F Cocco & Nicola Garbarinoifo, 2022. "Housing Consumption and Investment: Evidence from Shared Equity Mortgages," The Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3525-3573.
    13. Martin, Carolin & Schmitt, Noemi & Westerhoff, Frank, 2022. "Housing Markets, Expectation Formation And Interest Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 26(2), pages 491-532, March.
    14. Kindermann, Fabian & Le Blanc, Julia & Piazzesi, Monika & Schneider, Martin, 2021. "Learning about Housing Cost: Survey Evidence from the German House Price Boom," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242386, Verein für Socialpolitik / German Economic Association.
    15. Greg Howard & Jack Liebersohn, 2023. "Regional Divergence and House Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 312-350, July.
    16. Ma, Xutao & Zhang, Zhen, 2022. "Expectations, credit conditions, and housing boom-bust: Evidence from SVAR with sign and zero restrictions," Journal of Banking & Finance, Elsevier, vol. 134(C).
    17. Rüdiger Bachmann & Sebastian K. Rüth, 2020. "Systematic Monetary Policy And The Macroeconomic Effects Of Shifts In Residential Loan‐To‐Value Ratios," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 503-530, May.
    18. Kim, Jiseob, 2020. "Macroeconomic effects of the mortgage refinance and the home equity lines of credit," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    19. Sarah Kiesl-Reiter & Melanie Lührmann & Jonathan Shaw & Joachim Winter, 2024. "The Formation of Subjective House Price Expectations," Rationality and Competition Discussion Paper Series 491, CRC TRR 190 Rationality and Competition.
    20. Stefano Corradin & José Fillat & Carles Vergara-Alert, 2017. "Portfolio choice with house value misperception," Working Papers 17-16, Federal Reserve Bank of Boston.
    21. Bashir Ahmad Joo & Simtiha Ishaq Mir, 2024. "Evolution of the Household Debt Narrative: A PRISMA-compliant Systematic Literature Review," Paradigm, , vol. 28(1), pages 84-100, June.
    22. Maximilian Zurek, 2022. "Real Estate Markets and Lending: Does Local Growth Fuel Risk?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 62(1), pages 27-59, October.
    23. Diamond, William & Landvoigt, Tim, 2022. "Credit cycles with market-based household leverage," Journal of Financial Economics, Elsevier, vol. 146(2), pages 726-753.
    24. Minsu Chang, 2019. "A House Without a Ring: The Role of Changing Marital Transitions for Housing Decisions," 2019 Meeting Papers 514, Society for Economic Dynamics.
    25. Krivenko, Pavel, 2023. "The Role of Moving Shocks, Unemployment, and Policy in Understanding Housing Bust," Journal of Banking & Finance, Elsevier, vol. 154(C).

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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