Structural Demand Estimation with Borrowing Constraints

64 Pages Posted: 13 Oct 2015

See all articles by Amine Ouazad

Amine Ouazad

HEC Montréal

Romain G. Rancière

University of Southern California

Multiple version iconThere are 2 versions of this paper

Date Written: October 2015

Abstract

Structural models of housing or product choice use observed demand to estimate household preferences. However, household demand may be partly determined by borrowing constraints, limiting households' choice set. Such borrowing constraints will differ across locations, households, and years. We put forward a model of neighborhood choice with borrowing constraints that accounts for mortgage credit approval rates. We estimate the model's parameters using micro-level data on households, property transactions and mortgage applications for the San Francisco Bay. Approval rates vary significantly both across households and across neighborhoods. The model with borrowing constraints yields significantly higher estimated willingness to pay to live close to good schools and in majority-white neighborhoods. The model provides general equilibrium estimates of the impact of a relaxation of lending standards. Between 2000 and 2006, the model provides two out-of-sample predictions: (i) a compression of the price distribution and (ii) a decline in black households' exposure to white households. Both predictions are supported by empirical observation.

Keywords: demand estimation, house prices, housing, mortgage credit, segregation

JEL Classification: G21, R21, R23

Suggested Citation

Ouazad, Amine and Rancière, Romain G., Structural Demand Estimation with Borrowing Constraints (October 2015). CEPR Discussion Paper No. DP10866. Available at SSRN: https://ssrn.com/abstract=2673618

Amine Ouazad (Contact Author)

HEC Montréal ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

Romain G. Rancière

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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