Housing Market Dynamics

This paper presents a dynamic theory of housing market
fluctuations. It develops a life-cycle model where households are
heterogeneous with respect to income and preferences, and mortgage
lending is restricted by a down-payment requirement. The market
interaction of young credit-constrained households with older or
richer unconstrained households generates the following results.
(1) Current income of young credit-constrained households affects
housing prices independently of aggregate income. (2) Housing
prices and the number of housing transactions are positively
correlated. (3) Housing prices over-react to income shocks. (4) A
relaxation of the down-payment constraint triggers a boom-bust
cycle. These results are consistent with patterns observed in the
US and the UK.