Essays on Housing and Credit Markets

Abstract

My dissertation contains four chapters. The first chapter is the introduction. The second chapter is my job market paper. The third chapter is my third-year paper. The last chapter is the conclusion.Chapter 2 analyzes the effects of real interest rates on homebuilders and the housing market under fixed-rate mortgages (FRM), both in long-run equilibrium and during transitional dynamics, and finds that the endogenous supply-side response to interest rate increases mitigates short-run housing price declines. I develop a heterogeneous agent model incorporating different mortgage structures, liquid assets, lumpy housing adjustment, and a construction sector with time-to-build constraints to decompose the effects of interest rates on housing prices. The findings demonstrate that in a long-run stationary equilibrium, heterogeneous household policy functions and the corresponding stationary distribution influence housing demand, while increased interest rates consistently suppress construction activity. The calibrated model demonstrates that when the interest rate temporarily increases from 0.618% to 6%, it results in short-run housing prices exceeding those in a counterfactual without endogenous supply by 5 to 7 percentage points of the stationary price. Adjustable-rate mortgages reduce short-run housing prices by 1 percentage point of the stationary price relative to fixed-rate mortgages. The builder's financial constraint has limited impact on housing prices since a temporary increase in interest rates lowers optimal construction levels, resulting in a looser financial constraint.Chapter 3 elaborates the effect of housing prices on non-homeowners' non-housing consumption. Using a heterogeneous agent model, I show that low- and high-wealth households utilize unsecured debt, while middle-wealth households save against liquid assets. High-wealth households are simultaneously homeowners and mortgage borrowers. Rising housing prices generate increases in interest rates due to enhanced housing pledgeability, which subsequently crowds out unsecured debt availability for low-wealth households. Higher housing prices elevate the wealth threshold necessary for homeownership due to increased down payment requirements and the minimum purchase constraint. Although non-homeowners lack housing assets on their balance sheets, housing prices nonetheless impact their consumption through credit market spillovers. A reduction in the loan-to-value ratio constrains mortgage borrowing capacity, thereby decreasing aggregate mortgage demand. This effect on credit markets results in a lower equilibrium interest rate and attenuates consumption inequality across the wealth distribution.