A Quantitative Analysis of the U.S. Housing and Mortgage Markets and the Foreclosure Crisis

44 Pages Posted: 21 Mar 2015

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Burcu Eyigungor

Federal Reserve Bank of Philadelphia

Date Written: March 2015

Abstract

We present a model of long-duration collateralized debt with risk of default. Applied to the housing market, it can match the homeownership rate, the average foreclosure rate, and the lower tail of the distribution of home-equity ratios across homeowners prior to the recent crisis. We stress the role of favorable tax treatment of housing in matching these facts. We then use the model to account for the foreclosure crisis in terms of three shocks: overbuilding, financial frictions, and foreclosure delays. The financial friction shock accounts for much of the decline in house prices, while the foreclosure delays account for most of the rise in foreclosures. The scale of the foreclosure crisis might have been smaller if mortgage interest payments were not tax deductible. Temporarily higher inflation might have lowered the foreclosure rate as well.

Keywords: Leverage, Foreclosures, Mortgage Crisis

JEL Classification: E21, E32, E44, G21, H24

Suggested Citation

Chatterjee, Satyajit and Eyigungor, Burcu, A Quantitative Analysis of the U.S. Housing and Mortgage Markets and the Foreclosure Crisis (March 2015). FRB of Philadelphia Working Paper No. 15-13. Available at SSRN: https://ssrn.com/abstract=2580828 or http://dx.doi.org/10.2139/ssrn.2580828

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

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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