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A Theory of Housing Demand Shocks

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Abstract

Housing demand shocks in standard macroeconomic models are a primary source of house price fluctuations, but those models have difficulties in generating the observed large volatility of house prices relative to rents. We provide a microeconomic foundation for the reduced-form housing demand shocks with a tractable heterogenous-agent framework. In our model with heterogeneous beliefs, an expansion of credit supply raises housing demand of optimistic buyers and boosts house prices without affecting rents. A credit supply shock also leads to a positive correlation between house trading volumes and house prices. The theoretical mechanism and model predictions are supported by empirical evidence, and the results are robust to alternative specifications of heterogeneity.

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  • Ding Dong & Zheng Liu & Pengfei Wang & Tao Zha, 2022. "A Theory of Housing Demand Shocks," Working Paper Series 2019-9, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2019-09
    DOI: 10.24148/wp2019-09
    Note: The first version of this Working Paper was published March 7, 2019.
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    1. A Theory of Housing Demand Shocks
      by Christian Zimmermann in NEP-DGE blog on 2019-10-23 19:41:14

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    Cited by:

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    3. J. Scott Davis & Kevin X. D. Huang & Ayse Sapci, 2020. "Imperfect substitution in real estate markets and the effect of housing demand on corporate investment," Vanderbilt University Department of Economics Working Papers 20-00002, Vanderbilt University Department of Economics.
    4. Laura Bakkensen & Toan Phan & Russell Wong, 2023. "Leveraging the Disagreement on Climate Change: Theory and Evidence," Working Paper 23-01, Federal Reserve Bank of Richmond.
    5. 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.
    6. Davis, J. Scott & Huang, Kevin X.D. & Sapci, Ayse, 2022. "Land price dynamics and macroeconomic fluctuations with imperfect substitution in real estate markets," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    7. Margaret Jacobson, 2019. "Beliefs, Aggregate Risk, and the U.S. Housing Boom," 2019 Meeting Papers 1549, Society for Economic Dynamics.
    8. 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).
    9. Dong, Feng & Xu, Zhiwei, 2022. "Bubbly bailout," Journal of Economic Theory, Elsevier, vol. 202(C).
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    11. Heo, Ye Jin, 2022. "Population aging and house prices: Who are we calling old?," The Journal of the Economics of Ageing, Elsevier, vol. 23(C).

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    More about this item

    Keywords

    Housing demand; house prices; price-rent ratio; heterogeneous beliefs; Credit constraints;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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