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Housing and Liquidity

Chao He, Randall Wright () and Yu Zhu

Review of Economic Dynamics, 2015, vol. 18, issue 3, 435-455

Abstract: Coinciding with the start of the housing boom were large increases in home-equity lending and loan-to-equity ratios. We study this in models where housing bears a liquidity premium because it collateralizes loans. Even with fundamentals constant, since liquidity depends on beliefs, self-fulfilling prophecies allow prices to be cyclic, chaotic or stochastic. With changing fundamentals -- financial innovation -- we can account for half of the empirical price boom, suggesting there may well be room for self-fulfilling prophecies. Since liquidity premia are nonmonotone in loan-to-equity ratios, continuing financial innovation generates a price boom and bust. Finally, we study the impact of monetary policy. (Copyright: Elsevier)

Keywords: Housing; Lquidity; Collateral; Bubbles; Money (search for similar items in EconPapers)
JEL-codes: E44 G21 R21 R31 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.red.2014.09.009

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