Refereed Publications"Regulating Household Leverage"
(with Stephanie Johnson and John Mondragon), Forthcoming at Review of Economic Studies
This paper studies how credit markets respond to policy constraints on household leverage. Exploiting a sharp policy-induced discontinuity in the cost of originating certain high-leverage mortgages, we study how the Dodd-Frank "Ability-to-Repay" rule affected the price and availability of credit in the U.S. mortgage market. Our estimates show that the policy had only moderate effects on prices, increasing interest rates on affected loans by 10-15 basis points. The effect on quantities, however, was significantly larger; we estimate that the policy eliminated 15 percent of the affected market completely and reduced leverage for another 20 percent of remaining borrowers. This reduction in quantities is much greater than would be implied by plausible demand elasticities and indicates that lenders responded to the policy not only by raising prices but also by exiting the regulated portion of the market. Heterogeneity in the quantity response across lenders suggests that agency costs may have been one particularly important market friction contributing to the large overall effect as the fall in lending was substantially larger among lenders relying on third parties to originate loans. Finally, while the policy succeeded in reducing leverage, our estimates suggest this effect would have only slightly reduced aggregate default rates during the housing crisis.
Journal of Finance, 73(2), 523-573, 2018 (Winner of Brattle Group Prize for 2018: First Prize Paper)
I empirically analyze how changes in access to housing collateral affect homeowner borrowing behavior. To isolate the role of collateral constraints from that of wealth effects, I exploit the fully-anticipated expiration of resale price controls on owner-occupied housing in Montgomery County, Maryland. I estimate a marginal propensity to borrow out of housing collateral that ranges between $0.04–$0.13 and is correlated with homeowners’ initial leverage. Additional analysis of residential investment and ex-post loan performance indicates that some of the extracted funds generated new expenditures. These results suggest a potentially important role for collateral constraints in driving household expenditures.
(with Wenjie Ding, Fernando Ferreira, and Joseph Gyourko), Journal of Urban Economics, 108, 72-84, 2018
One of the striking features of the last U.S. housing boom was the heterogeneity in the timing of its onset across local markets. In this paper, we exploit this heterogeneity to estimate the extent to which the boom was spread via spatial spillovers from one market to another. Our analysis focuses on spillovers that occur around the time that a local market enters its boom, which we identify using sharp structural breaks in house price growth rates. On the extensive margin, there is evidence that the likelihood of a market booming increases substantially if nearby neighbors boom. On the intensive margin, we also find statistically significant but economically modest effects of the size of a neighbor’s boom on subsequent price growth in nearby markets. These affects appear to be unrelated to local market fundamentals, suggesting a potential role for non-rational factors.
(with Andrew Paciorek), American Economic Journal: Economic Policy, 9(1), 210-240, 2017
This paper provides novel estimates of the interest rate elasticity of mortgage demand by measuring the degree of bunching in response to a discrete jump in interest rates at the conforming loan limit—the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac. The estimates indicate that a 1 percentage point increase in the rate on a 30-year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. One-third of this response is driven by borrowers who take out second mortgages, which implies that total mortgage debt only declines by 1.5 to 2 percent.
Working Papers"Speculative Dynamics of Prices and Volume"
(with Charles G. Nathanson and Eric Zwick), Revised Draft, April 2018
NBER Working Paper No. 23449
Revision requested at Journal of Finance
We present a dynamic theory of prices and volume in housing cycles. In our framework, predictable price increases endogenously attract short-term buyers more strongly than long-term buyers. Short-term buyers amplify volume by selling more frequently, and they destabilize prices through positive feedback. Our model predicts a lead–lag relationship between volume and prices, which we confirm in the 2000–2011 U.S. housing bubble. Using data on 50 million home sales from this episode, we document that much of the variation in volume arose from the rise and fall in short-term investment.
(with John Mondragon), First Draft, August 2018
Revision requested at Journal of Finance
We study how employment documentation requirements and out-of-pocket closing costs constrain mortgage refinancing. These frictions, which bind most severely during recessions, may significantly inhibit monetary policy pass-through. To study their effects on refinancing, we exploit an FHA policy change that excluded unemployed borrowers from refinancing and increased others’ out-of-pocket costs substantially. These changes dramatically reduced refinancing rates, particularly among the likely unemployed and those facing new out-of-pocket costs. Our results imply that unemployed and liquidity-constrained borrowers have a high latent demand for refinancing. Cyclical variation in these factors may therefore affect both the aggregate and distributional consequences of monetary policy.
(by Amit Seru and Tomasz Piskorski), Brookings Papers on Economic Activity, Spring 2018