Leverage and House-Price Dynamics in U.S. Cities
40 Pages Posted: 26 Jul 2000 Last revised: 17 Apr 2021
Date Written: March 1997
In this paper, we use city-level data to analyze the relationship between homeowner borrowing patterns and house-price dynamics. Our principal finding is that in cities where homeowners are more leveraged--i.e., have higher loan-to-value ratios--house prices react more sensitively to city-specific shocks, such as changes in per-capita income. This finding is consistent with recent theories which emphasize the role of collateralized borrowing in shaping the behavior of asset prices.
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