Does Collateral Value Affect Asset Prices? Evidence from a Natural Experiment in Texas

62 Pages Posted: 30 Jul 2016 Last revised: 19 Apr 2018

Albert A. Zevelev

City University of New York - Department of Real Estate; University of Pennsylvania - The Wharton School

Date Written: April 9, 2018

Abstract

This paper identifies the impact of collateral value on house prices, exploiting law changes in Texas which legalized home equity loans in 1998. The impact of this credit expansion was positive, heterogeneous and direct. The laws increased Texas house prices 3.6%; this is price-based evidence that households are credit constrained. Prices rose more in locations with inelastic supply, higher pre-law house prices, population, income and employment. These estimates reveal that wealthier households value the option to pledge their home as collateral more strongly. Further estimates indicate that the effect was direct, as variables related to house prices were unaffected.

Keywords: Asset Pricing, Real Estate, real options, home equity, housing collateral, liquidity constraints, household consumption and saving decisions, leverage

JEL Classification: R0, R3, G0, E21, E44, G2

Suggested Citation

Zevelev, Albert A., Does Collateral Value Affect Asset Prices? Evidence from a Natural Experiment in Texas (April 9, 2018). Available at SSRN: https://ssrn.com/abstract=2815609 or http://dx.doi.org/10.2139/ssrn.2815609

Albert A. Zevelev (Contact Author)

City University of New York - Department of Real Estate ( email )

United States

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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