DP10866 Structural Demand Estimation with Borrowing Constraints

Author(s): Amine Ouazad, Romain Rancière
Publication Date: October 2015
Keyword(s): demand estimation, house prices, housing, mortgage credit, segregation
JEL(s): G21, R21, R23
Programme Areas: International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10866

Structural models of housing or product choice use observed demand to estimate household preferences. However, household demand may be partly determined by borrowing constraints, limiting households? choice set. Such borrowing constraints will differ across locations, households, and years. We put forward a model of neighborhood choice with borrowing constraints that accounts for mortgage credit approval rates. We estimate the model's parameters using micro-level data on households, property transactions and mortgage applications for the San Francisco Bay. Approval rates vary significantly both across households and across neighborhoods. The model with borrowing constraints yields significantly higher estimated willingness to pay to live close to good schools and in majority-white neighborhoods. The model provides general equilibrium estimates of the impact of a relaxation of lending standards. Between 2000 and 2006, the model provides two out-of-sample predictions: (i) a compression of the price distribution and (ii) a decline in black households' exposure to white households. Both predictions are supported by empirical observation.