Illiquidity and its Discontents: Trading Delays and Foreclosures in the Housing Market
No 1417, Working Papers from Department of Economics, University of Missouri
This paper investigates the macroeconomic effects of search risk in the housing market. To do so, I introduce a tractable directed search model of housing with mul- tidimensional buyer and seller heterogeneity. I incorporate this framework in an in- complete markets macroeconomic model with long-term mortgages and equilibrium default. I show that search risk spills over into higher foreclosure risk by creating a debt overhang problem. Heavily indebted sellers post high selling prices, take a long time to sell, and frequently end up in foreclosure. As a result, search risk increases mortgage default premia and tightens credit constraints, thus exacerbating the debt overhang problem by making refinancing more difficult. This mechanism establishes a novel link between housing and mortgage markets based on the illiquidity of housing.
Keywords: housing; liquidity; search theory; credit constraints; household debt; foreclosure (search for similar items in EconPapers)
JEL-codes: D31 D83 E21 E22 G11 G12 G21 R21 R31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge, nep-ger, nep-mac and nep-ure
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