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Interest rate fluctuations and equilibrium in the housing market

Interest rate fluctuations and equilibrium in the housing market Abstract I study the general equilibrium of the housing market in an economy populated by overlapping generations of households. A contribution of the present paper is to solve for the housing market equilibrium in the presence of aggregate (interest rate) uncertainty with a realistic mortgage contract. In addition, households also face idiosyncratic uncertainty resulting from stochastic changes over the lifecycle in tastes (or needs) for housing. In this environment, profit-maximizing banks offer fixed-rate mortgage (FRM) contracts to homebuyers. As seems plausible, each housing market transaction is subject to a fixed cost, which gives rise to S-s policy rules for housing transactions: existing homeowners change the size of their houses only if there is a sufficiently large change in the state of the economy (i.e., in interest rates, in their taste for housing, etc.). A plausibly calibrated version of the model is consistent with three empirically documented features of the housing market: (i) highly volatile housing prices and transaction volume, (ii) a strong positive correlation between transaction volume and housing prices, and (iii) a significant negative relationship between interest rates and housing prices, which can rationalize a large part of the recent boom in housing prices in the US and around the world. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B.E. Journal of Macroeconomics de Gruyter

Interest rate fluctuations and equilibrium in the housing market

Arslan, Yavuz
The B.E. Journal of Macroeconomics , Volume 14 (1) – Jan 1, 2014
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32 pages

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Publisher
de Gruyter
Copyright
Copyright © 2014 by the
ISSN
2194-6116
eISSN
1935-1690
DOI
10.1515/bejm-2013-0088
Publisher site
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Abstract

Abstract I study the general equilibrium of the housing market in an economy populated by overlapping generations of households. A contribution of the present paper is to solve for the housing market equilibrium in the presence of aggregate (interest rate) uncertainty with a realistic mortgage contract. In addition, households also face idiosyncratic uncertainty resulting from stochastic changes over the lifecycle in tastes (or needs) for housing. In this environment, profit-maximizing banks offer fixed-rate mortgage (FRM) contracts to homebuyers. As seems plausible, each housing market transaction is subject to a fixed cost, which gives rise to S-s policy rules for housing transactions: existing homeowners change the size of their houses only if there is a sufficiently large change in the state of the economy (i.e., in interest rates, in their taste for housing, etc.). A plausibly calibrated version of the model is consistent with three empirically documented features of the housing market: (i) highly volatile housing prices and transaction volume, (ii) a strong positive correlation between transaction volume and housing prices, and (iii) a significant negative relationship between interest rates and housing prices, which can rationalize a large part of the recent boom in housing prices in the US and around the world.

Journal

The B.E. Journal of Macroeconomics – de Gruyter

Published: Jan 1, 2014

References

  • Models of Cycles New York
    Lucas
  • An Aggregate Economy with Different Size Houses of the
    Rios
  • Plant Level Irreversible Investment and Equilibrium Cycles
    Veracierto
  • Sinai High Prices Bubbles Fundamentals of
    Himmelberg
  • In Bust Out Young Households and the Housing Price Cycle
    Ortalo
  • Firing Costs Cycle Fluctuations
    Veracierto
  • Income and Wealth Heterogeneity in the Macroeconomy of
    Krusell
  • Loss Aversion and Seller Behavior Evidence from Housing Market of
    Genesove
  • Asset Prices in an Exchange
    Lucas
  • Housing the Cycle
    Heathcote
  • Based Methods For Obtaining Approximate Solutions for Nonlinear Asset Pricing Models
    Hussey
  • Prices and Trading Volume in the Housing Market Model with Down - Payment Effects The of
    Stein
  • The Market Price of Aggregate Risk and the Wealth Distribution of
    Lustig
  • Prices Borrowing in the Cycle
    Iacoviello
  • Household Risk Management and Optimal Mortgage Choice of
    Campbell
  • Turnover as a Measure of Demand for Existing Homes Real
    Berkovec
  • The Market Price of Aggregate Risk and the Wealth Distribution of
    Lustig
  • Housing Market Spillovers : Evidence from an Estimated DSGE Model Macroeconomics
    Iacoviello
  • Vacancy Prices in a Housing Market Matching Model of
    Wheaton
  • Plant Level Irreversible Investment and Equilibrium Cycles
    Veracierto
  • The Wealth Dynamics of Families on
    Hurst
  • Prices Borrowing in the Cycle
    Iacoviello
  • An Aggregate Economy with Different Size Houses of the
    Rios
  • What is the Price Elasticity of Housing Demand The of and
    Hanushek
  • Loss Aversion and Seller Behavior Evidence from Housing Market of
    Genesove
  • Vacancy Prices in a Housing Market Matching Model of
    Wheaton
  • Housing Market Spillovers : Evidence from an Estimated DSGE Model Macroeconomics
    Iacoviello
  • Turnover as a Measure of Demand for Existing Homes Real
    Berkovec
  • Household Risk Management and Optimal Mortgage Choice of
    Campbell
  • Housing the Cycle
    Heathcote
  • Based Methods For Obtaining Approximate Solutions for Nonlinear Asset Pricing Models
    Hussey
  • Firing Costs Cycle Fluctuations
    Veracierto
  • The Wealth Dynamics of Families on
    Hurst
  • Sinai High Prices Bubbles Fundamentals of
    Himmelberg
  • Models of Cycles New York
    Lucas
  • Prices and Trading Volume in the Housing Market Model with Down - Payment Effects The of
    Stein
  • Income and Wealth Heterogeneity in the Macroeconomy of
    Krusell
  • Asset Prices in an Exchange
    Lucas
  • What is the Price Elasticity of Housing Demand The of and
    Hanushek
  • In Bust Out Young Households and the Housing Price Cycle
    Ortalo