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House Prices and Credit Constraints: Making Sense of the US Experience


  •  Corresponding author: Anthony Murphy, Research Department, Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, TX 75201, USA. Email:

  • We thank Kurt Johnson, David Luttrell and Jessica Renier for research support, Morris Davis, an anonymous referee and seminar participants at the 2010 Royal Economic Society Annual Conference, 2010 American Economic Association Meetings, Bank of Spain, Swiss National Bank, 2009 Spanish Applied Economics Conference, International Monetary Fund, 2009 Euro Area Business Cycle Network Conference, 2009 SUERF/Bank of Finland Housing Markets Conference, 2009 Swiss Society for Financial Market Research Meetings, the 2009 Western Economic Association International Annual Conference as well as Lancaster, Oxford and Marseilles Universities for helpful comments and suggestions. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Board of Governors of the Federal Reserve System. Any remaining errors are our own.


Most US house price models break down in the mid-2000s, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions – the cyclically adjusted loan-to-value ratio for first-time buyers – into house price-to-rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.