Army of Mortgagors: Long-Run Evidence on Credit Externalities and the Housing Market

Tobias Herbst, Moritz Kuhn and Farzad Saidi

No 18942, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Houses are the most important asset on American households’ balance sheets, rendering the U.S. economy sensitive to house prices. There is a consensus that credit conditions affect house prices, but to what extent remains controversial, as an expansion in credit supply often coincides with changes in house price expectations. To address this longstanding question, we rely on novel microdata on the universe of mortgages guaranteed under the Veterans Administration (VA) loan program. We use the expansion of eligibility of veterans for the VA loan program following the Gulf War to estimate a long-lived effect of credit supply on house prices. We then exploit the segmentation of the conventional mortgage market from program eligibility to link this sustained house price growth to developments in the initially unaffected segment of the credit market. We uncover a net increase in credit for all other residential mortgage applicants that aligns closely with the evolution of house price growth, which supports the view that credit-induced house price shocks are amplified by beliefs.

Keywords: beliefs; veterans; Credit supply; Mortgages; House prices (search for similar items in EconPapers)
JEL-codes: E21 G20 G21 G28 (search for similar items in EconPapers)
Date: 2024-03
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