55 Pages Posted: 19 Aug 2015 Last revised: 4 Dec 2016
Date Written: December 4, 2016
We analyze the implications of social externalities on mortgage debt holdings at individual and aggregate level. The focal point of the analysis is the triple role of residential real estate as a part of utility, a collateralizable portion of life-time wealth and a social positioning device. We find that social competition for leveraged durable goods is particularly costly for households with low education and limited initial resources. Moreover, if the wealth distribution is sufficiently unequal, an increase in aggregate wealth can decrease net savings and allow leverage to build up. As social competition intensifies, the debt-to-income ratio is increasing, resources are shifted towards the beginning of life and the effects of changes in regulatory conditions are more pronounced.
Keywords: Mortgage debt, social status, life-cycle models, heterogeneous agents
JEL Classification: E21, E50, G11
Suggested Citation: Suggested Citation