Working Papers

Abstract: I construct a quantitative model to rationalize two key features of the U.S. housing market: leverage positively correlates with housing prices, while mortgage spreads move inversely. In the model, overlapping generations use leverage to accumulate housing, facing a schedule, the Credit Surface, where interest rates increase with leverage. Negative aggregate shocks depress housing prices as young borrowers default, reducing lenders' wealth and driving up interest rates and spreads. The higher cost of borrowing reduces leverage, feeding back into further declines in housing prices. The model is calibrated to replicate the observed 10-percentage-point drop in leverage during the Great Recession.

Abstract: In the presence of a strong feedback loop between leverage and asset prices, large endowment shocks generate leverage cycles, resulting in significant volatilities in prices and household consumption. To attenuate leverage cycles, we explore the impacts of taxing versus subsidizing mortgage contracts. We find that taxation leads to higher housing prices and leverage, while reducing interest rates and spreads. Additionally, it enhances consumption smoothing across the life cycle and states, resulting in welfare gains for young households but losses for older ones. In contrast, subsidizing mortgage contracts produces minimal effects and fails to improve welfare for any age group. The observed asymmetric effects between tax and subsidy policies are caused by the unbalanced response from the supply and demand sides of the credit market. While demand responds little to these policies, taxing incentivizes lending by raising returns, whereas subsidizing leads lenders to suppress credit supply, exacerbating the credit climate. This study underscores the importance of considering the supply side responses in the credit market when designing effective policies.