Financial Constraints and Inflated Home Prices During the Real-Estate Boom
Charles A. Dice Center Working Paper No. 2009-1
48 Pages Posted: 25 Mar 2008 Last revised: 3 Jan 2012
Date Written: December 7, 2010
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: Suggested Citation