Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints

36 Pages Posted: 29 Jun 1998

See all articles by François Ortalo-Magné

François Ortalo-Magné

Wisconsin School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Sven Rady

University of Bonn

Date Written: June 1998

Abstract

This paper presents a first step towards a new theory of housing market fluctuations. We develop a life-cycle model where agents face credit constraints and their housing consumption is restricted to a discrete set of possibilities. The market interaction of young credit constrained agents climbing the property ladder with old agents trading down generates co-movements of aggregate house prices, volume of transactions and income, consistent with the patterns observed in the U.S. and the U.K. Under plausible assumptions, the model reproduces the slight lead of transaction volume over the other two series as documented in the data. Our theory asserts that the fluctuations in housing prices depend crucially on fluctuations in the current income of young households (the first-time buyers). Thus, it sheds light on why housing prices are more volatile than GDP and why they exhibit some degree of predictability in a market where households optimize over the timing of their transactions.

JEL Classification: E32, G12, G21, R21

Suggested Citation

Ortalo-Magne, Francois and Rady, Sven, Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints (June 1998). Available at SSRN: https://ssrn.com/abstract=102933 or http://dx.doi.org/10.2139/ssrn.102933

Francois Ortalo-Magne

Wisconsin School of Business ( email )

4300 Grainger Hall
975 University Avenue
Madison, WI 53706-1323
United States
608-262-7867 (Phone)
608-262-7867 (Fax)

HOME PAGE: http://francois.marginalq.com

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Sven Rady (Contact Author)

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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