Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints *

Francois Ortalo-Magne and Sven Rady

The Review of Economic Studies, 2006, vol. 73, issue 2, 459-485

Abstract: We propose a life-cycle model of the housing market with a property ladder and a credit constraint. We focus on equilibria that replicate the facts that credit constraints delay some households' first home purchase and force other households to buy a home smaller than they would like. The model helps us identify a powerful driver of the housing market: the ability of young households to afford the down payment on a starter home, and in particular their income. The model also highlights a channel whereby changes in income may yield housing price overreaction, with prices of trade-up homes displaying the most volatility, and a positive correlation between housing prices and transactions. This channel relies on the capital gains or losses on starter homes incurred by credit-constrained owners. We provide empirical support for our arguments with evidence from both the U.K. and the U.S. Copyright 2006, Wiley-Blackwell.

Date: 2006
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Related works:
Working Paper: Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraint (2005)
Working Paper: Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (2002)
Working Paper: Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (2001)
Working Paper: Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (2001)
Working Paper: Housing Market Dynamics: on the Contribution of Income Shocks and Credit Constraints (2001)
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