A Theory of Housing Demand Shocks

40 Pages Posted: 28 Mar 2019

See all articles by Zheng Liu

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Pengfei Wang

HKUST, Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Tao A. Zha

Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: 2019-03-01

Abstract

Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the "price-rent puzzle"). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.

Keywords: price-rent puzzle, heterogeneity, marginal agent, cutoff point, liquidity premium, price-to-rent ratio, collateral constraint

JEL Classification: E21, E44, G21

Suggested Citation

Liu, Zheng and Wang, Pengfei and Zha, Tao A., A Theory of Housing Demand Shocks (2019-03-01). FRB Atlanta Working Paper No. 2019-4. Available at SSRN: https://ssrn.com/abstract=3361424 or http://dx.doi.org/10.29338/wp2019-04

Zheng Liu (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Pengfei Wang

HKUST, Department of Economics ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Tao A. Zha

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-521-8353 (Phone)
404-521-8956 (Fax)

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