NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium

Jack Favilukis, Sydney C. Ludvigson, Stijn Van Nieuwerburgh

NBER Working Paper No. 15988
Issued in May 2010
NBER Program(s):   AP   EFG   ME

This paper studies a quantitative general equilibriummodel of the housing market where a large number of overlapping generations of homeowners face both idiosyncratic and aggregate risks but have limited opportunities to insure against these risks due to incomplete financial markets and collateralized borrowing constraints. Interest rates in the model, like housing and equity returns, are determined endogenously from a market clearing condition. The model has two key elements not previously considered in existing quantitative macro studies of housing finance: aggregate business cycle risk, and a realistic wealth distribution driven in the model by bequest heterogeneity in preferences. These features of the model play a crucial role in the following results. First, a relaxation of financing constraints leads to a large boom in house prices. Second, the boom in house prices is entirely the result of a decline in the housing risk premium. Third, low interest rates cannot explain high home values.

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This paper was revised on February 18, 2015

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Document Object Identifier (DOI): 10.3386/w15988

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