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

61 Pages Posted: 30 Jul 2016 Last revised: 14 Aug 2019

See all articles by Albert A. Zevelev

Albert A. Zevelev

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

Date Written: July 31, 2019

Abstract

Does the ability to pledge an asset as collateral, after purchase, affect its price? This paper identifies the impact of collateral service flows on house prices, exploiting a plausibly exogenous constitutional amendment in Texas which legalized home equity loans in 1998. The law change increased Texas house prices 4.6%; this is price-based evidence that households are credit-constrained and value home equity loans to facilitate consumption smoothing. Prices rose more in locations with inelastic supply, higher pre-law house prices, higher income, and lower unemployment. These estimates reveal that richer households value the option to pledge their home as collateral more strongly.

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 (July 31, 2019). 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
318
Abstract Views
3,870
rank
98,522
PlumX Metrics