A Quantitative Analysis of the US Housing and Mortgage Markets and the Mortgage Crisis

Satyajit Chatterjee () and Burcu Eyigungor

No 1109, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We construct a quantitative equilibrium model that accounts for the salient features of the US housing market, namely, the homeownership rate, the average foreclosure rate prior to the crisis and the distribution of home-equity ratios across homeowners. Given this steady state, we examine the consequences of a 3 percent unexpected increase in the supply of housing on house prices and foreclosures. We analyze the impact of the tax code, namely the the fact that the implicit rental income from housing is not taxed and that the mortgage interest payment is tax deductible, for the steady state of the model as well as for the impact of the unanticipated supply shock. We show that the model is able to account for the observed decline in house prices with a modest increase in the cost of new mortgages following the shock (crisis) and predicts a large increase in foreclosures.

Date: 2011
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