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Liquidity Constraints in the U.S. Housing Market

Virgiliu Midrigan and Denis Gorea
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Virgiliu Midrigan: New York University
Denis Gorea: Bank of Canada

No 802, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We study the severity of liquidity constraints in the U.S. housing market using a lifecycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or extract home equity. The model reproduces well the distribution of individual-level balance sheets – the fraction of housing, mortgage debt and liquid assets in a household’s wealth, the fraction of hand-to-mouth homeowners (Kaplan and Violante, 2014), as the well as the frequency of housing turnover and home equity extraction in the 2001 data. The model implies that 75% of homeowners are liquidity constrained and willing to pay an average of 9 cents to extract an additional dollar of liquidity from their home. Liquidity constraints imply sizable welfare losses that amount to a 1.2% permanent drop in consumption, despite the relatively high frequency of home equity extraction observed in the data.

New Economics Papers: this item is included in nep-dge and nep-ure
Date: 2017
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