Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession

Abstract

Using a quantitative heterogeneous agents macro-housing model and detailed micro data, this paper studies the drivers of the 2006-2011 housing bust, its spillovers to consumption and the credit market, and the ability of mortgage rate interventions to accelerate the recovery. The model features tenure choice between owning and renting, rich portfolio choice, long-term defaultable mortgages, and endogenously illiquid housing from search frictions. The equilibrium analysis and empirical evidence suggest that the deterioration in house prices and liquidity-transmitted to consumption via balance sheets that vary in composition and depth-is central to explaining the observed aggregate and cross-sectional patterns.

The Homeownership Experience of Minorities During the Great Recession

“…The view has been encapsulated in Campbell and Cocco (2015), Gerardi et al (2015), and Schelkle (2014). Most recently, Garriga and Hedlund (2016) argue that a future default could occur even among sellers with positive equity who face selling delays and are unable to sell the house at a reasonable price influenced by their outstanding debt. The presence of selling uncertainty creates a new region that depends on how quickly homes can sell in the market.…”