TY - JOUR AU - Bajari,Patrick AU - Chan,Phoebe AU - Krueger,Dirk AU - Miller,Daniel TI - A Dynamic Model of Housing Demand: Estimation and Policy Implications JF - National Bureau of Economic Research Working Paper Series VL - No. 15955 PY - 2010 Y2 - April 2010 UR - http://www.nber.org/papers/w15955 L1 - http://www.nber.org/papers/w15955.pdf N1 - Author contact info: Patrick Bajari University of Washington 331 Savery Hall UW Economics Box 353330 Seattle, Washington 98195-3330 E-Mail: Bajari@uw.edu Phoebe Chan Economics Department Wheaton College Norton, MA 02766-2322 E-Mail: chan_phoebe@wheatoncollege.edu Dirk Krueger Economics Department University of Pennsylvania 160 McNeil Building 3718 Locust Walk Philadelphia, PA 19104 Tel: 215/898-6691 Fax: 215/573-2057 E-Mail: dkrueger@econ.upenn.edu Daniel Miller Economics Department, Clemson University 222 Sirrine Hall Celmson, SC 29634 E-Mail: dmille7@g.clemson.edu AB - Using data from the Panel Study of Income Dynamics (PSID) we specify, estimate and simulate a dynamic structural model of housing demand. Our model generalizes previous applied econometric work by incorporating realistic features of the housing market including non-convex adjustment costs from buying and selling a home, credit constraints from minimum downpayment requirements and uncertainty about the evolution of incomes and home prices. We argue that these features are critical for capturing salient features of housing demand observed in the PSID. After estimating the model we use it to simulate how consumer behavior responds to house price and income declines as well as tightening credit. These experiments are motivated by the U.S. recession starting in December of 2007 that saw large falls in home prices, large negative income shocks for many households and tightening credit standards. In the short run, relatively few households adjust their housing stock. Households respond instead by reducing non-housing consumption and reducing wealth because they wish to avoid losing their home and the associated adjustment costs. Households that adjust in the short run are those hit with a series of bad shocks, such as a negative income shock and a home price decline. A larger proportion of households do adjust their consumption in the long run, increasing their housing stock since housing is less expensive. However, such changes may occur several years after the shocks listed above. ER -