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Does Collateral Value Affect Asset Prices? Evidence from a Natural Experiment in Texas

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  • Albert Alex Zevelev

Abstract

Does the ability to pledge an asset as collateral, after purchase, affect its price? This paper identifies the impact of collateral service flows on house prices, exploiting a plausibly exogenous constitutional amendment in Texas that legalized home equity loans in 1998. The law change increased Texas house prices 4 $\%$; this is price-based evidence that households are credit-constrained and value home equity loans to facilitate consumption smoothing. Prices rose more in locations with inelastic supply, higher prelaw house prices, higher income, and lower unemployment. These estimates reveal that richer households value the option to pledge their home as collateral more strongly.

Suggested Citation

  • Albert Alex Zevelev, 2021. "Does Collateral Value Affect Asset Prices? Evidence from a Natural Experiment in Texas," The Review of Financial Studies, Society for Financial Studies, vol. 34(9), pages 4373-4411.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:9:p:4373-4411.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa117
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    Citations

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    Cited by:

    1. Zhou, Jing, 2022. "Collateral quality and house prices," Journal of Economic Dynamics and Control, Elsevier, vol. 145(C).
    2. Kerr, Sari Pekkala & Kerr, William R. & Nanda, Ramana, 2022. "House prices, home equity and entrepreneurship: Evidence from U.S. census micro data," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 103-119.
    3. Taskin, Ahmet Ali & Yaman, Firat, 2023. "The effect of branching deregulation on finance wage premium," FAU Discussion Papers in Economics 08/2023, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    4. Jan Rouwendal & Antonia Petrat, 2022. "Mortgage underwriting and house prices: Evidence from the 2011 change in the Dutch Code of Conduct for mortgage loans," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(4), pages 1141-1159, December.

    More about this item

    JEL classification:

    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • G0 - Financial Economics - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G2 - Financial Economics - - Financial Institutions and Services

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