Systemic Stability of Housing and Mortgage Market: A State-Dependent Four-Phase Model

Abstract:     
Motivated by the revealed preference approach to consumer theory, this study constructs a dynamic theoretical model which infers the unobservable household behavior from the observable patterns of housing and mortgage market activities. The model emphasizes the role of sellers and their asymmetric behavior in different phases of a housing market cycle in generating certain price-volume patterns. Such role has so far largely been ignored in both theoretical and empirical studies of housing markets. The model also establishes, theoretically, multiple channels via which housing and mortgage markets interact and via which speculative forces are propagated. In addition, it generates a testable result regarding the stability of the system formed by the two markets, which may be extended by endogenizing some important policy instruments.

Number of Pages in PDF File: 44

Keywords: systemic stability, speculation, asymmetric seller response, state-dependency

JEL Classification: R21, R31, D53, D82, D84, E32, G01

working papers series