Financial Constraints and Inflated Home Prices During the Real-Estate Boom

Fisher College of Business Working Paper No. 2009-03-001

Charles A. Dice Center Working Paper No. 2009-1

48 Pages Posted: 25 Mar 2008 Last revised: 3 Jan 2012

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Date Written: December 7, 2010

Abstract

During the housing boom, financially constrained home buyers artificially inflated transaction prices in order to draw larger mortgages. Using transaction data from Illinois that includes sellers' offers to inflate prices, I estimate that in 2005-2008, up to 16% of highly-leveraged transactions had inflated prices of up to 9%. Inflated transactions were common in low-income neighborhoods and when intermediaries had a greater stake or an informational advantage. Borrowers who inflated prices were more likely to default, but their mortgage rates were not materially higher. Property prices in areas with a high rate of past price inflation exhibited momentum and high volatility.

Keywords: Manipulation, Fraud, Moral Hazard, Agency Costs,Delegated Monitoring, Mortgage, Collateral, Appraisal, Valuation, Debt, Bank, Financial Intermediation, Cheating, Mortgage, Subprime, Lending, Capital Market, Real-Estate, Forensic Economics, Overpaying, Fannie Mae, Loan buyers, Borrower, Lender

JEL Classification: D12, G21, L85

Suggested Citation

Ben-David, Itzhak, Financial Constraints and Inflated Home Prices During the Real-Estate Boom (December 7, 2010). Fisher College of Business Working Paper No. 2009-03-001; Charles A. Dice Center Working Paper No. 2009-1. Available at SSRN: https://ssrn.com/abstract=991387

Itzhak Ben-David (Contact Author)

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

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