Financial Constraints and Inflated Home Prices during the Real Estate Boom

Itzhak Ben-David

American Economic Journal: Applied Economics, 2011, vol. 3, issue 3, 55-87

Abstract: During the housing boom, financially constrained home buyers artificially inflated transaction prices in order to draw larger mortgages. Using transaction data from Illinois that includes sellers' offers to inflate prices, I estimate that in 2005-2008, up to 16 percent of highly leveraged transactions had inflated prices of up to 9 percent. Inflated transactions were common in low-income neighborhoods and when intermediaries had a greater stake or an informational advantage. Borrowers who inflated prices were more likely to default, but their mortgage rates were not materially higher. Property prices in areas with a high rate of past price inflation exhibited momentum and high volatility. (JEL D14, E31, R31)

JEL-codes: D14 E31 R31 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/app.3.3.55
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Citations: View citations in EconPapers (93)

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