Housing prices and credit constraints in competitive search

Abstract

We embed a competitive search model of the real estate market into a heterogeneous agentsetting where hoeholds face credit constraints and idiosyncratic turnover shocks. Householdscan accumulate a risk-free asset to build a down payment and to smooth non-housing consumption.There is an inelastic supply of identical homes. The model is "block recursive". Inequilibrium wealthier home buyers sort into submarkets with higher prices and shorter buyingtimes. We identify a novel amplification mechanism, arising from sorting, by which demandshocks can substantially affect housing prices. In particular, lowering down payment requirementsinduces entry of new buyers in the market and higher asset accumulation by currentsearchers, as these agents target more expensive (less congested) submarkets. This affects thedistribution of prices and trading probabilities, and thereby the wealth distribution. Our quantitativeresults suggest that the effects on the long-run level and dispersion of housing pricescan be significant.