Interest Rate Fluctuations and Equilibrium in the Housing Market

Yavuz Arslan

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: I study the general equilibrium of the housing market in an economy populated by over-lapping generations of households. A contribution of the present paper is to solve for the housing market equilibrium in the presence of aggregate (interest rate) uncertainty with a realistic mortgage contract. In addition, households also face idiosyncratic uncertainty resulting from stochastic changes over the lifecycle in tastes (or need) for housing. In this environment, profit-maximizing banks offer fixed-rate mortgage (FRM) contracts to homebuyers. As seems plausible, each housing market transaction is subject to a fixed cost, which gives rise to S-s policy rules for housing transactions : existing homeowners change the size of their houses only if there is a sufficiently large change in the state of the economy (i.e., in interest rates, in their taste for housing, etc.). A plausibly calibrated version of the model is consistent with three empirically documented features of the housing market : (i) highly volatile housing prices and transaction volume, (ii) a strong positive correlation between transaction volume and housing prices, and (iii) a signi?cant negative relationship between interest rates and housing prices, which can rationalize a large part of the recent boom in housing prices in the U.S. and around the world.

Keywords: House prices; Interest rates; Mortgage contracts (search for similar items in EconPapers)
JEL-codes: D91 E21 G01 R21 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Interest rate fluctuations and equilibrium in the housing market (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1343

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