Credit Supply and House Prices: Evidence from Mortgage Market Segmentation

41 Pages Posted: 10 Feb 2012  

Manuel Adelino

Duke University; Duke Innovation & Entrepreneurship Initiative; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Felipe Severino

Tuck School of Business at Dartmouth

Multiple version iconThere are 2 versions of this paper

Date Written: February 2012

Abstract

We show that easier access to credit significantly increases house prices by using exogenous changes in the conforming loan limit as an instrument for lower cost of financing. Houses that become eligible for financing with a conforming loan show an increase in house value of 1.16 dollars per square foot (for an average price per square foot of 220 dollars) and higher overall house prices controlling for a rich set of house characteristics. However, these estimated coefficients are consistent with a local elasticity of house prices to interest rates that is lower than some previous studies proposed (below 10). In addition, loan to value ratios around the conforming loan limit deviate significantly from the common 80 percent norm, which confirms that it is an important factor in the financing choices of home buyers. In line with our interpretation, the results are stronger in the first half of our sample (1998-2001) when the conforming loan limit was more important, given that other forms of financing were less common and substantially more expensive. Results are also stronger in zip codes where personal income growth is low or declining, and in regions with lower elasticity of housing supply.

Suggested Citation

Adelino, Manuel and Schoar, Antoinette and Severino, Felipe, Credit Supply and House Prices: Evidence from Mortgage Market Segmentation (February 2012). NBER Working Paper No. w17832. Available at SSRN: https://ssrn.com/abstract=2002584

Duke Innovation & Entrepreneurship Initiative ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Felipe Severino

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.dartmouth.edu/~fseverino

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