Credit Demand in a Crisis

Negative shocks to housing, most households’ largest consumption good, are expected to create strong credit demand to smooth these shocks over time. We estimate and trace a credit demand curve for households who recently experienced a negative shock to their housing stock. We use administrative data on over one million applications to a federal loan program for households impacted by natural disasters. Our identification strategy exploits 24 quasi-experiments, leveraging exogenous, time-based variation in the program's offered interest rate to estimate extensive-margin demand. We find that households are surprisingly price-sensitive, only a third would accept loans offered at the 30-year mortgage rate. We find a large impact of credit quality on demand and evidence of monthly payment targeting. Credit-constrained households exhibit inelastic demand. Many high credit quality applicants are reluctant to borrow, even at very low interest rates where no private alternative exists.