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Housing and Liquidity

Author

Listed:
  • Chao He

    (Renmin University of China)

  • Randall Wright

    (University of Wisconsin-Madison)

  • Yu Zhu

    (University of Leicester)

Abstract

Coinciding with the start of the housing boom were large increases in home-equity lending and loan-to-equity ratios. We study this in models where housing bears a liquidity premium because it collateralizes loans. Even with fundamentals constant, since liquidity depends on beliefs, self-fulfilling prophecies allow prices to be cyclic, chaotic or stochastic. With changing fundamentals -- financial innovation -- we can account for half of the empirical price boom, suggesting there may well be room for self-fulfilling prophecies. Since liquidity premia are nonmonotone in loan-to-equity ratios, continuing financial innovation generates a price boom and bust. Finally, we study the impact of monetary policy. (Copyright: Elsevier)

Suggested Citation

  • Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.
    • Handle: RePEc:red:issued:14-2
    DOI: 10.1016/j.red.2014.09.009
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    More about this item

    Keywords

    Housing; Lquidity; Collateral; Bubbles; Money;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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