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Home Construction Financing and Search Frictions in the Housing Market

Author

Listed:
  • Miroslav Gabrovski

    (University of Hawaii Manoa)

  • Victor Ortego-Marti

    (Department of Economics, University of California Riverside)

Abstract

This paper studies the effects of financial frictions in construction on housing market dynamics. To this end, we build a search-theoretic model of the housing market in which there is endogenous entry of buyers and developers face credit constraints. Our model explores a novel channel that links credit frictions faced by developers to the housing market: developers must search for financing before building a home à la Wasmer and Weil (2004). We calibrate the model to quantify the size of the credit channel during the 2012–2019 housing market recovery. Through a series of counterfactuals, our model predicts that the credit channel had a large impact on housing liquidity, construction, and the vacancy rate. Furthermore, it accounts for around half of the rise in prices during the 2012-2019 housing market recovery.

Suggested Citation

  • Miroslav Gabrovski & Victor Ortego-Marti, 2022. "Home Construction Financing and Search Frictions in the Housing Market," Working Papers 202217, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202217
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    More about this item

    Keywords

    Housing market; Search and matching; Endogenous separations; Bev- eridge Curve; Housing liquidity;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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