Joint Dynamics of House Prices and Foreclosures

Yavuz Aslan, Bulent Guler and Temel Taskin

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

Abstract: This paper studies the joint transitional dynamics of the foreclosures and house prices in a standard life-cycle incomplete markets model with housing and a realistic long-term mortgage structure. We calibrate our model to match several long term features of the US housing market, and analyze the effects of several unexpected and permanent shocks on the house price and the foreclosure rate both across the steady-states and along the transition between the steady-states. We examine permanent, unexpected shocks to the risk-free interest rate, the minimum down payment ratio, and unemployment. During the transition, these shocks create large movements in house prices. More importantly, the foreclosure dynamics are quite significant along the transition compared to the steady-state changes, and there are strong feedbacks between foreclosures and house prices. We assess the effects of a temporary reduction in the risk-free interest rate, which has moderate effects on house prices but little effect on foreclosure dynamics. We also study the effects of an ex-ante macroprudential policy, which establishes a minimum downpayment requirement at a higher threshold. Such a macroprudential policy helps substantially stabilize both house prices and foreclosures.

Keywords: Housing; House price; Interest rate; Mortgage contract; Mortgage default; Home equity (search for similar items in EconPapers)
JEL-codes: D91 E21 G01 R21 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1440

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