Joint Dynamics of House Prices and Foreclosures

Joint Dynamics of House Prices and Foreclosures

Title:

Joint Dynamics of House Prices and Foreclosures

Number:

14/40

Author(s):

Yavuz Arslan, Bülent Güler, Temel Taşkın

Language:

English

Date:

December 2014

Abstract:

This paper studies the joint transitional dynamics of the foreclosures and house prices in a standard life-cycle incomplete markets model with housing and a realistic long-term mortgage structure. We calibrate our model to match several long term features of the US housing market, and analyze the effects of several unexpected and permanent shocks on the house price and the foreclosure rate both across the steady-states and along the transition between the steady-states. We examine permanent, unexpected shocks to the risk-free interest rate, the minimum down payment ratio, and unemployment. During the transition, these shocks create large movements in house prices. More importantly, the foreclosure dynamics are quite significant along the transition compared to the steady-state changes, and there are strong feedbacks between foreclosures and house prices. We assess the effects of a temporary reduction in the risk-free interest rate, which has moderate effects on house prices but little effect on foreclosure dynamics. We also study the effects of an ex-ante macroprudential policy, which establishes a minimum downpayment requirement at a higher threshold. Such a macroprudential policy helps substantially stabilize both house prices and foreclosures.

Keywords:

Housing, House price, Interest rate, Mortgage contract, Mortgage default, Home equity.

JEL Codes:

D91; E21; G01; R21

Joint Dynamics of House Prices and Foreclosures
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