Interest Rates and Housing Market Dynamics in a Housing Search Model

61 Pages Posted: 1 Nov 2017

See all articles by Elliot Anenberg

Elliot Anenberg

Board of Governors of the Federal Reserve System

Edward Kung

California State University, Northridge - David Nazarian College of Business and Economics

Date Written: October 30, 2017

Abstract

We introduce mortgages into a dynamic equilibrium, directed search model of the housing market. Mortgage rates play their natural role in our model by affecting the share of per-period income that a homeowner spends on mortgage payment rather than consumption. We estimate the model using microdata on home listings, exploiting the insights of Menzio and Shi (2010) to handle the significant heterogeneity that even basic mortgages introduce into a search model. The estimated model shows that, because of search frictions, housing market conditions are significantly more responsive to mortgage rates than suggested by reduced-form correlations of rates with house prices. Buyer willingness to pay for the typical home changes by more than twice as much as average house prices in response to an interest rate change. As in the data, home construction is more rate sensitive than prices in our model.

Keywords: housing search, interest rates, house prices, directed search

Suggested Citation

Anenberg, Elliot and Kung, Edward, Interest Rates and Housing Market Dynamics in a Housing Search Model (October 30, 2017). Available at SSRN: https://ssrn.com/abstract=3062113 or http://dx.doi.org/10.2139/ssrn.3062113

Elliot Anenberg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Edward Kung

California State University, Northridge - David Nazarian College of Business and Economics ( email )

Northridge, CA 91330
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
75
Abstract Views
481
rank
348,162
PlumX Metrics