Supply Restrictions, Subprime Lending and Regional US House Prices
42 Pages Posted: 4 May 2015
Date Written: December 19, 2014
With regard to the recent US house price cycle, we analyze how the interaction between housing supply restrictions, mortgage credit constraints and a price-toprice feedback loop affects house price volatility. Considering 247 Metropolitan Statistical Areas, we estimate a simultaneous boom-bust system for house prices, housing supply and subprime lending. The model accounts for regional differences in supply elasticities that are determined by local variations in topographical and regulatory supply restrictions. Our results suggest that tighter supply restrictions lead to both a larger house price boom and bust, and that this is due to supply restricted areas being significantly more exposed to a financial accelerator effect and a price-to-price expectation mechanism. We further find that the presence of endogenous price acceleration mechanisms contribute to dilute the positive relationship between the total quantity response and the supply elasticity.
Keywords: Regional Boom-Bust Cycles; Housing Supply Restrictions; Subprime Lending; Financial Accelerator
JEL Classification: E32; E44; G21
Suggested Citation: Suggested Citation