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Home Construction Financing and Search Frictions in the Housing Market

Miroslav Gabrovski () and Victor Ortego-Marti ()

No 202217, Working Papers from University of California at Riverside, Department of Economics

Abstract: This paper studies the effects of financial frictions in construction on housing market dynamics. To this end, we build a search-theoretic model of the housing market in which there is endogenous entry of buyers and developers face credit constraints. Our model explores a novel channel that links credit frictions faced by developers to the housing market: developers must search for financing before building a home à la Wasmer and Weil (2004). We calibrate the model to quantify the size of the credit channel during the 2012–2019 housing market recovery. Through a series of counterfactuals, our model predicts that the credit channel had a large impact on housing liquidity, construction, and the vacancy rate. Furthermore, it accounts for around half of the rise in prices during the 2012-2019 housing market recovery.

Keywords: Housing market; Search and matching; Endogenous separations; Bev- eridge Curve; Housing liquidity (search for similar items in EconPapers)
JEL-codes: E2 E32 R21 R31 (search for similar items in EconPapers)
Pages: 30 Pages
Date: 2022-10
New Economics Papers: this item is included in nep-dge and nep-ure
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