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Default When House Prices are Uncertain

Author

Listed:
  • Erwan Quintin

    (University of Wisconsin at Madison)

  • Morris Davis

    (University of Wisconsin-Madison)

Abstract
During the 2000-2011 housing boom and bust, changes to self-assessed house prices in 20 different metro areas are highly correlated with changes to the Case-Shiller-Weiss (CSW) house price indexes, but do not change percent-for-percent with the CSW indexes during the boom or bust. We argue this evidence is consistent with an environment in which homeowners imperfectly observe the value of their home and update their guess of home value using a Kalman filter. Using data on self-assessed house prices and the CSW indexes, we estimate the parameters of a simple model of imperfectly-observed house prices. In an out-of-sample forecast exercise, we show the model is nearly perfectly able to replicate the sequence of self-assessed house prices from 2006-2011 in many MSAs, from places experiencing a modest boom like Atlanta and Detroit to the "bubble" areas like Miami and Phoenix. We then specify an economic model of the optimal default decisions of homeowners when homeowners imperfectly observe the value of their home. We show that, relative to a standard model of default, homeowners delay their decision to default after a bad house price shock. We argue this phenomenon helps to explain default patterns in the United States during the 2007-2011 housing bust.

Suggested Citation

  • Erwan Quintin & Morris Davis, 2014. "Default When House Prices are Uncertain," 2014 Meeting Papers 246, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:246
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    References listed on IDEAS

    as
    1. Makoto Nakajima & Irina A. Telyukova, 2020. "Home Equity In Retirement," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 573-616, May.
    2. Lester, Benjamin & Visschers, Ludo & Wolthoff, Ronald, 2017. "Competing with asking prices," Theoretical Economics, Econometric Society, vol. 12(2), May.
    3. Karl E. Case & John M. Quigley & Robert J. Shiller, 2011. "Wealth Effects Revisited 1978-2009," Cowles Foundation Discussion Papers 1784, Cowles Foundation for Research in Economics, Yale University.
    4. Katherine A. Kiel & Jeffrey E. Zabel, 1999. "The Accuracy of Owner‐Provided House Values: The 1978–1991 American Housing Survey," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 263-298, June.
    5. Allen Head & Huw Lloyd-Ellis & Hongfei Sun, 2014. "Search, Liquidity, and the Dynamics of House Prices and Construction," American Economic Review, American Economic Association, vol. 104(4), pages 1172-1210, April.
    6. Ronald Wolthoff & Lodewijk Visschers & Benjamin Lester, 2012. "Asking Prices and Inspection Goods," 2012 Meeting Papers 792, Society for Economic Dynamics.
    7. Geltner, David Michael, 1991. "Smoothing in Appraisal-Based Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 4(3), pages 327-345, September.
    8. Quan, Daniel C & Quigley, John M, 1991. "Price Formation and the Appraisal Function in Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 127-146, June.
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    Cited by:

    1. Johannes Strobel & Binh Nguyen Thanh & Gabriel Lee, 2020. "Effects of Macroeconomic Uncertainty and Labor Demand Shocks on the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(2), pages 345-372, June.
    2. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 753-811, Elsevier.

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