House Prices and Credit Constraints: Making Sense of the US Experience

Abstract:     
Most US house price models break down in the mid-2,000s, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions - the cyclically adjusted loan-to-value ratio for first time buyers - into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.

Number of Pages in PDF File: 34

Keywords: credit standards, house price to rent ratio, house prices, subprime mortgages

JEL Classification: C51, C52, E51, G21, R31

working papers series