Liquidity Constraints in the U.S. Housing Market

Denis Gorea, Virgiliu Midrigan

NBER Working Paper No. 23345
Issued in April 2017
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

We study the severity of liquidity constraints in the U.S. housing market using a life-cycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or obtain home equity loans. The model reproduces well the distribution of individual-level balance sheets – the fraction of housing, mortgage debt and liquid assets in households' wealth, the fraction of hand-to-mouth homeowners (Kaplan and Violante, 2014), as well as the frequency of housing turnover and home equity extraction in the 2001 data. The model implies that 75% of homeowners are liquidity constrained and willing to pay an average of 8 cents to extract an additional dollar of liquidity from their home. Liquidity constraints imply sizable welfare losses equivalent to a 1.2% permanent reduction in consumption.

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Document Object Identifier (DOI): 10.3386/w23345

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