Financial Constraints and Inflated Home Prices During the Real-Estate Boom
Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)
December 7, 2010
Fisher College of Business Working Paper No. 2009-03-001
Charles A. Dice Center Working Paper No. 2009-1
During the housing boom, financially constrained home buyers artificially inflated transaction prices in order to draw larger mortgages. Using transaction data from Illinois that includes sellers' offers to inflate prices, I estimate that in 2005-2008, up to 16% of highly-leveraged transactions had inflated prices of up to 9%. Inflated transactions were common in low-income neighborhoods and when intermediaries had a greater stake or an informational advantage. Borrowers who inflated prices were more likely to default, but their mortgage rates were not materially higher. Property prices in areas with a high rate of past price inflation exhibited momentum and high volatility.
Number of Pages in PDF File: 48
Keywords: Manipulation, Fraud, Moral Hazard, Agency Costs,Delegated Monitoring, Mortgage, Collateral, Appraisal, Valuation, Debt, Bank, Financial Intermediation, Cheating, Mortgage, Subprime, Lending, Capital Market, Real-Estate, Forensic Economics, Overpaying, Fannie Mae, Loan buyers, Borrower, Lender
JEL Classification: D12, G21, L85Accepted Paper Series
Date posted: March 25, 2008 ; Last revised: January 3, 2012
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