House Prices, Investors, and Credit in the Great Housing Bust (Job Market Paper)
This paper studies the role played by investors in stabilizing housing markets during the Great Housing Bust. Using transaction-level data, I distinguish between two types of housing investors that were active during this period: large, deep-pocketed corporate investors, and small household investors that rely on mortgage credit. I estimate that in response to a negative mortgage credit supply shock, house prices fell by 30 percent more in markets where household investors absorbed a larger share of house purchases than did corporate investors. To rationalize this result, I build a heterogeneous agent model of the housing market featuring both types of investors. In response to a negative mortgage credit shock, the model generates much larger equilibrium house price declines when household investors are required to absorb falling homeowner demand rather than corporate investors. To induce household investment as mortgage credit tightens, prices must fall to generate large enough returns to compensate households who are on average poorer and more indebted than previous investors. Additionally, in contrast to corporate investors, household investors are sensitive to changing credit conditions, the illiquidity of housing assets, and losses on primary property wealth. Finally, I show that the greater housing market stability associated with corporate investment activity results in higher household welfare. This is the case even though homeownership rates fall by more and housing returns accrue to outside firms rather than households.
Fluctuations in house prices can generate large movements in household expenditure. However, empirical work exploring this relationship must deal with the endogeneity problems associated with using house prices as a regressor. A popular instrumental variables strategy exploits cross-sectional variation in house prices as predicted by the local housing supply elasticities of Saiz (2010). As an alternative, I introduce a Bartik instrument for house prices that consists of the interaction between the pre-existing local supply of housing characteristics and broad changes in the relative demand for those characteristics. I show that the instrument is a strong predictor of house price growth in both the cross-section and through time. I then use household panel data on non-durable expenditures to estimate the elasticity of consumption with respect to local house price growth. I report precise estimates in the range of 0.10 to 0.15, which correspond to marginal propensities to consume out of housing wealth of 1.2 to 1.8 cents in the dollar. These estimates are robust to controls for aggregate fluctuations, local business cycles, and local industry and demographic composition. In contrast, I show that the traditional housing supply elasticity instrument produces inconsistent estimates when confronted with these same controls. Thus, the Bartik instrument succeeds in generating plausibly exogenous variation in house prices when housing supply elasticity instruments may fail. When decomposing variation in the Bartik instrument, I find that the identified consumption response to house prices is largely driven by times and locations where house prices varied the most: during the 2008 recession and in the Western US.
Research In Progress
Beliefs over Housing Booms and Busts: Evidence from the Great Recession (with Christos A. Makridis)
The Purchase Price Premium for New Houses (with Don Schlagenhauf)
Optimal Monetary Policy and the Exchange Rate (with Christie Smith)