Financial Constraints and Inflated Home Prices during the Real Estate Boom | Zendy

Itzhak BenDavid | Zendy

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Financial Constraints and Inflated Home Prices during the Real Estate Boom

Author(s) -

Itzhak BenDavid

Publication year - 2011

Publication title -

american economic journal applied economics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 12.996

H-Index - 82

eISSN - 1945-7782

pISSN - 1945-7790

DOI - 10.1257/app.3.3.55

Subject(s) - real estate , boom , database transaction , monetary economics , volatility (finance) , economics , transaction data , order (exchange) , business , inflation (cosmology) , financial economics , finance , physics , environmental engineering , theoretical physics , computer science , engineering , programming language

During the housing boom, financially constrained home buyers artificially inflated transaction prices in order to draw larger mortgages. Using transaction data from Illinois that includes sellers' offers to inflate prices, I estimate that in 2005-2008, up to 16 percent of highly leveraged transactions had inflated prices of up to 9 percent. Inflated transactions were common in low-income neighborhoods and when intermediaries had a greater stake or an informational advantage. Borrowers who inflated prices were more likely to default, but their mortgage rates were not materially higher. Property prices in areas with a high rate of past price inflation exhibited momentum and high volatility. (JEL D14, E31, R31)

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