Date of Award

2015

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Graduate Group

Applied Economics

First Advisor

Joseph Gyourko

Second Advisor

Fernando Ferreira

Abstract

This dissertation consists of three self-contained chapters that study various interactions between the housing market, mortgage choice, and public policy. The first chapter studies how changes to the collateral value of real estate assets affect homeowner borrowing. While previous research has documented a positive relationship between house prices and home-equity based borrowing, a key empirical challenge has been to disentangle the role of collateral constraints from that of wealth effects in generating this relationship. To isolate the role of collateral constraints, I exploit the fully anticipated expiration of resale price controls created through an inclusionary zoning regulation in Montgomery County, Maryland. I estimate that the marginal propensity to borrow out of increases in housing collateral is between $0.04 and $0.13. The magnitude of this effect is correlated with a homeowner's initial leverage and additional analysis of residential investment and ex-post loan performance further suggests that borrowers used some portion of the extracted funds to finance current consumption and investment expenditures. These results highlight the importance of collateral constraints for homeowner borrowing and suggest a potentially important role for house price growth in driving aggregate consumption.

The second chapter, co-authored with Andrew Paciorek, provides novel estimates of the interest rate elasticity of mortgage demand by measuring the extent to which households "bunch" at a discrete jump in interest rates generated by the conforming loan limit. Our estimates imply that a 1 percentage point increase in the rate on a 30-year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. One-third of this response is driven by borrowers who take out second mortgages, which implies that total mortgage debt only declines by 1.5 to 2 percent.

The third chapter, co-authored with Joseph Gyourko, Fernando Ferreira, and Wenjie Ding, uses extensive micro data to investigate whether contagion was an important factor in the last housing cycle. Our estimates provide evidence of contagion during the housing boom, but not during the bust. We also find that contagion effects are greater when transmitted from a larger to a smaller market, and are more important for the most elastically-supplied markets. Local fundamentals and expectations of future fundamentals have limited ability to account for our estimated effect.

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