DP8360 House Prices and Credit Constraints: Making Sense of the US Experience

Author(s): John V Duca, John Muellbauer, Anthony Murphy
Publication Date: April 2011
Keyword(s): credit standards, house price to rent ratio, house prices, subprime mortgages
JEL(s): C51, C52, E51, G21, R31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8360

Most US house price models break down in the mid-2000's, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions--the cyclically adjusted loan-to-value ratio for first time buyers--into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.