NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Liquidity Constraints and Housing Prices: Theory and Evidence from the VA Mortgage

Jacob L. Vigdor

NBER Working Paper No. 10611
Issued in July 2004
NBER Program(s):   PE

This paper employs a simple intertemporal model to show that presence of liquidity constraints can depress the price of a durable good below its net present rental value, regardless of the overall supply elasticity. The existence of price effects implies that the relaxation of liquidity constraints is not Pareto improving, and may in fact be regressive. Historical evidence, which exploits the fact that a clearly identifiable group, war veterans, enjoyed the most favored access to mortgage credit in the postwar era, supports the model. The results suggest that more recent mortgage market innovations have served primarily to increase prices rather than home ownership rates, and that such innovations have the potential to exacerbate socioeconomic disparities in ownership rates.

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Document Object Identifier (DOI): 10.3386/w10611

Published: Vigdor, Jacob L. "Liquidity Constraints And Housing Prices: Theory And Evidence From The VA Mortgage Program," Journal of Public Economics, 2006, v90(8-9,Sep), 1579-1600.

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