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A DYNAMIC MODEL OF HOUSING DEMAND: ESTIMATION AND POLICY IMPLICATIONS

Authors

  • Patrick Bajari,

    1. University of Minnesota and NBER, U.S.A.; Wheaton College, U.S.A.; University of Pennsylvania and NBER, U.S.A.; Clemson University, U.S.A.
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  • Phoebe Chan,

    1. University of Minnesota and NBER, U.S.A.; Wheaton College, U.S.A.; University of Pennsylvania and NBER, U.S.A.; Clemson University, U.S.A.
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  • Dirk Krueger,

    1. University of Minnesota and NBER, U.S.A.; Wheaton College, U.S.A.; University of Pennsylvania and NBER, U.S.A.; Clemson University, U.S.A.
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  • Daniel Miller

    1. University of Minnesota and NBER, U.S.A.; Wheaton College, U.S.A.; University of Pennsylvania and NBER, U.S.A.; Clemson University, U.S.A.
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    • Please address correspondence to: Daniel Miller, John E. Walker Department of Economics, Clemson University, 228 Sirrine Hall, Clemson, SC 29634. E-mail: dmille7@g.clemson.edu


  • Manuscript received October 2010; revised February 2012.

Abstract

Using data from the PSID, we estimate a dynamic model of housing demand with nonconvex adjustment costs, credit constraints, and uncertainty about income and home prices. We simulate how consumer behavior responds to house price and income declines as well as tightening credit. In response to a negative home price shock, households early in the life cycle climb the housing ladder more quickly and invest more in housing assets due to the lower price. With a concurrent negative income shock, however, housing demand falls among young and middle aged households who stay in smaller homes rather than to trade up.

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