The Missing Home Buyers: Regional Heterogeneity and Credit Contractions

Abstract

This paper demonstrates that the protracted decrease in young homeownership since the Great Recession was driven by high-house price regions, despite credit standards changing mostly nationally. Using a panel of U.S. metro areas, I calibrate a multi-region dynamic equilibrium model with overlapping generations of mobile households. Aggregate and regional dynamics are explained by the heterogeneous impacts of an aggregate credit contraction rather than by local shocks. Preexisting differences between regions and cohorts amplify differences in busts. The effect of subsidies to first-time buyers is dampened, because they fail to stimulate regions that suffer larger busts. Place-based subsidies achieve larger gains.

Keywords: Regional business cycles, dynamic spatial equilibrium, credit conditions, mortgages, first-time buyers, home ownership, house prices, subsidies, Millennials

JEL Classification: E21, E30, E60, G11, G21, G51, J11, R20, R50