Housing prices and credit constraints in competitive search

Abstract

Wealthier, risk-averse buyers pay more to speed up transactions in competitive search markets. This result is established in a dynamic housing model where households save to smooth consumption and build a down payment. “Block recursivity” is ensured by the existence of risk-neutral housing intermediaries. In the long run, the calibrated benchmark features higher indebtedness and house prices than a Walrasian model, especially when housing supply elasticity is low. The long-run price effects of greater credit availability are much larger if rental and owner-occupied stocks are segmented, but even without segmentation they can be substantial when supply elasticity is low.