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Housing Prices and Credit Constraints in Competitive Search

Juan Pablo Rincón-Zapatero (), Belén Jerez () and Antonia Díaz ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: In this paper we embed a directed search model of the real estate market into a heterogeneous agents setting to study the effect of credit on housing prices. Households can either rent or own their home and face idiosyncratic turnover shocks which make them want to change residence. They can accumulate financial assets to put a down payment on a home and to smooth consumption. Search and matching frictions generate frictional dispersion in housing prices and financial assets in equilibrium. Our model is “block recursive” and highly tractable. We calibrate it to reproduce selected statistics for the US. We extend the Endogenous Grid Method with non-convexities to our environment to compute it. In our framework the distribution of wealth, housing prices, and trading probabilities (e.g. liquidity of housing assets) are crucially affected by credit conditions. Our mechanism greatly amplifies the effect of changes in financial conditions on housing prices.

Keywords: Endogenous; Grid; Method; Block-Recursivity; Price; Dispersion; Housing; Prices; Directed; Search; Incomplete; Markets; Wealth; Inequality (search for similar items in EconPapers)
JEL-codes: R30 R21 E21 D83 D31 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
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Working Paper: Housing prices and credit constraints in competitive search (2020) Downloads
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