Housing Wealth Reallocation between Subprime and Prime Borrowers during Recessions

Abstract

The Survey of Consumer Finances indicates that, unlike subprime borrowers, prime borrowers are more likely to own investment homes during recessions than during recoveries. Drawing on this empirical fact, we present and estimate a dynamic stochastic general equilibrium model that distinguishes between borrowers through their credit access. We find that the relative ease of credit access among borrowers explains the divergence in investment homeownership seen in the data. This divergence is amplified when subprime borrowers are subject to lax credit conditions prior to a financial shock or when the nominal interest rate is constrained at the zero lower bound. An expansionary monetary policy helps bridge this gap across borrowers.

Keywords: housing investment, credit access, subprime borrowers, prime borrowers

JEL Classification: E130, E210, E430, E440, G210, R210