Liquidity Constraints in the U.S. Housing Market

48 Pages Posted: 1 May 2017

See all articles by Denis Gorea

Denis Gorea

Government of Canada - Bank of Canada

Virgiliu Midrigin

New York University (NYU) - Department of Economics

Date Written: April 2017

Abstract

We study the severity of liquidity constraints in the U.S. housing market using a life-cycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to extract home equity by refinancing their long-term mortgages. The model implies that three quarters of homeowners are liquidity constrained and willing to pay an average of 5 cents to extract an additional dollar of liquidity from their home. Most homeowners value liquidity for precautionary reasons, anticipating the possibility of income declines and the need to make mortgage payments in future periods. Mortgage assistance policies structured as credit lines to homeowners who experience a shortfall in income greatly reduce the severity of liquidity constraints.

Suggested Citation

Gorea, Denis and Midrigin, Virgiliu, Liquidity Constraints in the U.S. Housing Market (April 2017). NBER Working Paper No. w23345. Available at SSRN: https://ssrn.com/abstract=2961050

Denis Gorea (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Laurier Avenue West
Ottawa, Ontario K1A 0G9
Canada

HOME PAGE: http://sites.google.com/site/goreadenis/

Virgiliu Midrigin

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

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