Monetary Policy, Hot Housing Markets and Leverage

Abstract

This paper presents a theory in which expansionary monetary policy causes a rise in leverage. Low mortgage rates encourage buyers to enter the housing market, raising the housing sales rate. Because lenders can resell seized foreclosure inventory at lower cost in such a hot housing market, ex-ante they feel comfortable financing a larger fraction of the house purchase. Consistent with this mechanism, this study documents empirically that the housing sales rate is highly sensitive to monetary policy. Calibrating a New Keynesian macroeconomic model augmented with credit-constrained consumers and with housing market search frictions, this housing liquidity channel of monetary policy contributes substantially to the effect of monetary policy on credit markets and the real economy. More generally, this framework suggests that measures to stimulate housing liquidity, including monetary policy alternatives such as home buyer tax credits, are key to stimulating access to credit.

Monetary Policy, Residential Investment, and Search Frictions: An Empirical and Theoretical Synthesis

“…This suggests that the simple bargaining protocol used in the DSGE model does not provide enough persistence in house prices. Alternative protocols may increase the persistence, or persistence can be mechanically introduced by following Ungerer (2015).…”

“…This literature includes, but is not limited to, Stull (1978), Yinger (1981), Wheaton (1990), Williams (1995), Krainer (2001), Albrecht et al (2007), Novy-Marx (2009), Caplin and Leahy (2011), Díaz and Jerez (2013, Ngai and Tenreyro (2014), Albrecht, Gautier, and Vroman (2015) and Ungerer (2015). To my knowledge, Ungerer (2015) is the only one of these papers to include search and matching in the housing market of a new Keynesian model. However, all of these papers, including Ungerer (2015), have a constant or exogenous housing stock with no role for residential investment.…”

“…To my knowledge, Ungerer (2015) is the only one of these papers to include search and matching in the housing market of a new Keynesian model. However, all of these papers, including Ungerer (2015), have a constant or exogenous housing stock with no role for residential investment. Head and Lloyd-Ellis (2012), Karahan and Rhee (2013), Head, Lloyd-Ellis, and Sun (2014) and Hedlund (2015) provide a small, recent literature that includes both housing search and endogenous housing construction.…”

Monetary Policy, Residential Investment, and Search Frictions: An Empirical and Theoretical Synthesis

“…This literature includes, but is not limited to, Stull (1978), Yinger (1981), Wheaton (1990), Williams (1995), Krainer (2001), Albrecht et al (2007), Novy-Marx (2009), Caplin andLeahy (2011), Díaz andJerez (2013), Ngai and Tenreyro (2014), Albrecht, Gautier, and Vroman (2015) and Ungerer (2015). To my knowledge, Ungerer (2015) is the only one of these papers to include search and matching in the housing market of a new Keynesian model. However, all of these papers, including Ungerer (2015), have a constant or exogenous housing stock with no role for residential investment.…”

“…To my knowledge, Ungerer (2015) is the only one of these papers to include search and matching in the housing market of a new Keynesian model. However, all of these papers, including Ungerer (2015), have a constant or exogenous housing stock with no role for residential investment. Head and Lloyd-Ellis (2012), Karahan and Rhee (2013), Head, Lloyd-Ellis, and Sun (2014) and Hedlund (2015) provide a small, recent literature that includes both housing search and endogenous housing construction.…”