Liquidity Constraints in the U.S. Housing Market

52 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 can extract home equity by refinancing their mortgages. The model implies that four-fifths of homeowners are liquidity constrained and willing to pay an average of 13 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. The model reproduces well the observed response of consumption to tax rebates and mortgage relief programs and predicts large welfare gains from policies aimed at providing temporary liquidity relief to homeowners.

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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