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.
Dong, Ding, Pengfei Wang, Tao Zha, and Zheng Liu. 2019. “A Theory of Housing Demand Shocks,” Federal Reserve Bank of San Francisco Working Paper 2019-09. Available at https://doi.org/10.24148/wp2019-09