QED Working Paper Number
1359

The effects of households' indebtedness on their house-selling decisions are studied in a dynamic equilibrium model with search in the housing market and defaultable long-term mortgages. In equilibrium, both sellers' asking prices and time-to-sell increase with the relative size of their outstanding mortgages. In turn, the liquidity of the housing market associated with time-to-sell determines the mortgage standards of competitive lenders, measured by the maximum loan-to-value (LTV) ratio offered at origination. Calibrated to the U.S. economy, the model generates, as observed, positive correlations over time between house prices and LTV's at origination and across sellers among asking prices, time-to-sell, and LTV's outstanding.

Author(s)
Allen Head
Amy Hongfei Sun
Chenggang Zhou
JEL Codes
E30
G21
R10
R31
Keywords
Block Recursive Equilibrium
Housing
Mortgages
Foreclosures
Directed Search
Liquidity
Working Paper