This paper establishes a theoretical and empirical link between the use of aggressive mortgage lending instruments and the underlying house price volatility. Within the context of a general equilibrium model with borrowing constraints, we demonstrate that the supply of aggressive lending instruments, such as non-amortizing low-equity mortgages, increases the asset prices in the underlying market because borrowers use these instruments to further leverage their current income. Thus, the aggressive lending instruments effectively relax the borrowing constraint faced by prospective homeowners. Furthermore, in our model lenders rationally re-price all mortgage instruments following a negative demand shock. We show that the relative use of aggressive lending instruments declines following a negative demand shock whether this re-pricing is anticipated or not. These two results provide for the important policy implication that the availability of aggressive mortgage lending instruments magnifies the real estate cycle and the effects of large negative demand shocks. Using both local and national price index data we empirically confirm the predictions of the model. In particular, we find that neighborhoods and cities that experienced a high concentration of aggressive lending instruments at their respective real estate market peaks suffered more severe price declines and a lower supply of aggressive instruments following a negative demand shock. Overall, we find that the fluctuation of supply of aggressive lending instruments increases the volatility of the underlying asset prices over the course of the market cycle.
1010 Affordable Housing Amazon Amenitization Architecture Artificial Intelligence Asia Australia automation Autonomous Vehicles bonds Borrowing Constraints Brexit California Canada Capital Business China Co-Working Environment coastal markets cold storage Colombia Commercial Brokerage Commercial Real Estate commissions Congestion consumer bias covid-19 CRE credit card market Credit Default Swaps Credit Insurance Credit Risk Transfers Culture Data Analytics data centers Data Collection Technology Debt Market Demand Demographics Density Development Discrete Choice disruption Diversity drones e-Commerce Economic Corridors economic policy economics education election studies Equity Funds Equity Market Ethnic Factors Europe Fannie Mae financial asset management Foreclosures Foreign Policy France Freddie Mac general equilibrium Global global economy Global Financial Crisis Globalization great depression Great Recession healthy buildings Hedonic hospitality Housing & Residential housing boom Housing Disease housing prices Housing Supply Identity Income Inequality India inflation Inter-generational mobility interest rates Investing jobs labor market Lagging Regions land use regulation Language life sciences Macroeconomics malls Market Pricing megacities Microeconomics Migration Minimum Payments Mixed-Use Mobility moral hazard mortgage insurance mortgage market Mortgage Rates Mortgages Multi-family Nation Building Non-Traditional Mortgages Office Market office sector pension funds Placed Based Policies Political Risk Price Discovery Private Equity Business public health public policy Public Schools real estate brokerage Real Estate Investment Real Estate Investment Trusts Recession Rental Retail Retirement reverse mortgages Risk Adjustment risk management risk-shifting robotics single family housing Slums Sorting South America Spatial Regions spillover effect stimulus package Sub-Prime Mortgages Supply Chains Sustainability Technology telecommunications trade transportation unemployment United States Urban Urbanization Warehouse welfare work from home