Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy

Satyajit Chatterjee () and Burcu Eyigungor

No 09-22, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper is superseded by WP 15-15

The authors construct a quantitative equilibrium model of the housing market in which an unanticipated increase in the supply of housing triggers default mortgages via its effect on house prices. The decline in house prices creates an incentive to increase the consumption of housing space, but leverage makes it costly for homeowners to sell their homes and buy bigger ones (they must absorb large capital losses). Instead, leveraged households find it advantageous to default and rent housing space. Since renters demand less housing space than homeowners, foreclosures are a negative force affecting house prices. The authors explore the possible effects of the government's foreclosure prevention policy in their model. They find that the policy can temporarily reduce foreclosures and shore up house prices.

Keywords: Housing; Default (Finance); Foreclosure (search for similar items in EconPapers)
Pages: 38 pages
Date: 2009
New Economics Papers: this item is included in nep-dge, nep-reg and nep-ure
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Citations: View citations in EconPapers (31)

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