Foreclosures and House Price Dynamics: A Quantitative Analysis of the Mortgage Crisis and the Foreclosure Prevention Policy

28 Pages Posted: 8 Oct 2009

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Burcu Eyigungor

Federal Reserve Bank of Philadelphia

Date Written: September 9, 2009

Abstract

The authors construct a quantitative equilibrium model of the housing market in which an unanticipated increase in the supply of housing triggers default mortgages via its effect on house prices. The decline in house prices creates an incentive to increase the consumption of housing space, but leverage makes it costly for homeowners to sell their homes and buy bigger ones (they must absorb large capital losses). Instead, leveraged households find it advantageous to default and rent housing space. Since renters demand less housing space than homeowners, foreclosures are a negative force affecting house prices. The authors explore the possible effects of the government's foreclosure prevention policy in their model. They find that the policy can temporarily reduce foreclosures and shore up house prices.

Keywords: Leverage, Foreclosures, Mortgage Crisis, Loan Modifications, Foreclosure Prevention Policy

Suggested Citation

Chatterjee, Satyajit and Eyigungor, Burcu, Foreclosures and House Price Dynamics: A Quantitative Analysis of the Mortgage Crisis and the Foreclosure Prevention Policy (September 9, 2009). FRB of Philadelphia Working Paper No. 09-22. Available at SSRN: https://ssrn.com/abstract=1484986 or http://dx.doi.org/10.2139/ssrn.1484986

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Philadelphia, PA 19106-1574
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HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Burcu Eyigungor

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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