By Juan Pablo Rincón-Zapatero, Maria Belen Jerez Garcia-Vaquero and Antonia Diaz Rodriguez
We embed a competitive search model of the real estate market into a heterogeneous agent setting where households face credit constraints and idiosyncratic turnover shocks. Households can accumulate a risk-free asset to build a down payment and to smooth non-housing consumption.There is an inelastic supply of identical homes. The model is “block recursive”. In equilibrium wealthier home buyers sort into submarkets with higher prices and shorter buying times. We identify a novel amplification mechanism, arising from sorting, by which demand shocks can substantially affect housing prices. In particular, lowering down payment requirements induces entry of new buyers in the market and higher asset accumulation by current searchers, as these agents target more expensive (less congested) submarkets. This affects the distribution of prices and trading probabilities, and thereby the wealth distribution. Our quantitative results suggest that the effects on the long-run level and dispersion of housing prices can be significant.
Nice paper that highlights how general equilibrium effects are important and can annihilate the intended effect of a policy. For example, making it easier to get a mortgage may just increase house prices with no change in house ownership.