Does Collateral Value Affect Asset Prices? Evidence from a Natural Experiment in Texas
77 Pages Posted: 30 Jul 2016 Last revised: 24 Jul 2020
Date Written: June 10, 2020
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%; 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: Suggested Citation