A Theory of Housing Demand Shocks

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Abstract

Housing demand shocks in standard macroeconomic models are a primary source of house price fluctuations, but those models have difficulties in generating the observed large volatility of house prices relative to rents. We provide a microeconomic foundation for the reduced-form housing demand shocks with a tractable heterogenous-agent framework. In our model with heterogeneous beliefs, an expansion of credit supply raises housing demand of optimistic buyers and boosts house prices without affecting rents. A credit supply shock also leads to a positive correlation between house trading volumes and house prices. The theoretical mechanism and model predictions are supported by empirical evidence, and the results are robust to alternative specifications of heterogeneity.

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APA

Dong, D., Liu, Z., … Zha, T. (2022). A Theory of Housing Demand Shocks. Federal Reserve Bank of San Francisco, Working Paper Series, 01–63. https://doi.org/10.24148/wp2019-09

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