Board of Governors of the Federal Reserve System

December 2019

The Propagation of Demand Shocks Through Housing Markets

Elliot Anenberg and Daniel R. Ringo

Abstract:

Housing demand stimulus produces a multiplier effect by freeing up owners attempting to sell their current home, allowing them to re-enter the market as buyers and triggering a chain of further transactions. Exploiting a shock to first-time home buyer demand caused by the 2015 surprise cut in Federal Housing Administration mortgage insurance premiums, we find that homeowners buy their next home sooner when the probability of their current home selling increases. This effect is especially pronounced in cold housing markets, in which homes take a long time to sell. We build and calibrate a model of the joint buyer-seller search decision that explains these findings as a result of homeowners avoiding the cost of owning two homes simultaneously. Simulations of the model demonstrate that stimulus to home buying generates a substantial multiplier effect, particularly in cold housing markets.

Accessible materials (.zip)

DOI: https://doi.org/10.17016/FEDS.2019.084

PDF: Full Paper