Collateral Constraints, Wealth Effects, and Volatility: Evidence from Real Estate Markets
41 Pages Posted: 6 Oct 2016 Last revised: 8 Aug 2017
Date Written: January 16, 2017
We find that housing return volatility is negatively correlated with income at the zip-code level. We rationalize this finding with a model featuring a collateral constraint that translates income volatility to housing return volatility. Collateral constraints are tighter for lower-income areas, causing higher housing return volatility. We validate this mechanism using variation in wealth induced by lagged housing returns, using cross-sectional data on the housing expenditure share, and using state-level non-recourse status to instrument for collateral constraints. Consistent with our model, housing return volatility is negatively correlated with lagged returns, positively correlated with expenditure share, and higher in non-recourse states.
Keywords: House prices, collateral constraints, volatility
JEL Classification: R31, G12, G30
Suggested Citation: Suggested Citation