Working Papers

2019-09 | May 2022


A Theory of Housing Demand Shocks


Housing demand shocks in standard macroeconomic models are a primary source of house price fluctuations, but those models have difficulties in generating the observed large volatility of house prices relative to rents. We provide a microeconomic foundation for the reduced-form housing demand shocks with a tractable heterogenous-agent framework. In our model with heterogeneous beliefs, an expansion of credit supply raises housing demand of optimistic buyers and boosts house prices without affecting rents. A credit supply shock also leads to a positive correlation between house trading volumes and house prices. The theoretical mechanism and model predictions are supported by empirical evidence, and the results are robust to alternative specifications of heterogeneity.

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Article Citation

Dong, Ding, Zheng Liu, Pengfei Wang, and Tao Zha. 2019. "A Theory of Housing Demand Shocks," Federal Reserve Bank of San Francisco Working Paper 2019-09. Available at