House Price Dynamics and Mortgage Default Risk

75 Pages Posted: 12 Aug 2023 Last revised: 3 Jul 2024

See all articles by Jordan Martel

Jordan Martel

Indiana University Bloomington, Kelley School of Business

Michael Woeppel

Indiana University - Kelley School of Business - Department of Finance

Date Written: March 13, 2024

Abstract

We find that house price momentum, defined as positive autocorrelation in aggregate house price changes, is stronger and house price change volatility is weaker when and where mortgage default risk at origination is higher. These facts appear widely, both geographically and temporally, and are difficult to reconcile with existing theories of house price dynamics. To explain these facts, we introduce a model in which lenders use valuations that incorporate information relatively slowly. In equilibrium, prices reflect the valuations used by lenders most when default risk is highest. Our model jointly explains the observed relations between default risk, momentum, and volatility.

Keywords: House prices, mortgage default risk, momentum, volatility

JEL Classification: G11, G12, G51, R30

Suggested Citation

Martel, Jordan and Woeppel, Michael, House Price Dynamics and Mortgage Default Risk (March 13, 2024). Available at SSRN: https://ssrn.com/abstract=4528447 or http://dx.doi.org/10.2139/ssrn.4528447

Jordan Martel (Contact Author)

Indiana University Bloomington, Kelley School of Business ( email )

HOME PAGE: http://www.jordanmartel.com

Michael Woeppel

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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