Our website will undergo scheduled maintenance on the morning of Thursday, August 11, 2022. During this time, connection to our website and some of its features may be unavailable. Thank you for your patience and we apologize for any inconvenience.

Working Paper

A Theory of Housing Demand Shocks


Abstract: Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the ?price-rent puzzle?). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.

Keywords: price-rent puzzle; heterogeneity; marginal agent; cutoff point; liquidity premium; price-to-rent ratio; collateral constraints;

JEL Classification: E21; E44; G21;

https://doi.org/10.29338/wp2019-04

Access Documents

Authors

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2019-03-01

Number: 2019-4

Pages: 40 pages