Housing Market Contagion: Evidence from Bank Branching Networks
34 Pages Posted: 29 Jun 2016
Date Written: June 20, 2015
Abstract
The impact of house price declines on collateral values for consumer debt is well documented; we are the first to highlight a complementary effect through the bank branching network. Our identification strategy depends on following price declines in one housing market to all bank branches outside the state. Using household-level data we find that real estate shocks to the bank significantly impact consumer borrowing (relative to other households in the county), especially for financial institution's without access to funding markets and when the loan is more difficult to securitize with the GSEs. The results cannot be explained by other bank health measures or local demand shocks. Conditional on a loan approval, negative real estate shocks result in higher interest rates and lower loan-to-income ratios. Specifically, a ten percent decline in real estate prices transmits to a 7% decline in primary mortgage approval, a 23% decline in HELOCs, and a 14% decline in refinances.
Keywords: Mortgage Markets, Banking, Credit Supply, House Prices
JEL Classification: G21, R21, R30
Suggested Citation: Suggested Citation