Economics Seminar（2016-09）

Topic:Credit Expansion, Competition, and House Prices: Evidence from Changes in Conforming Loan Limits
Speaker: Vincent Yao,Georgia State University

Time: Tuesday, June 7, 14:00-15:30
Place: Room 217, Guanghua Building 2
 

Abstract:    

Government policies play an important role in the mortgage and housing markets. We test this conjecture using an exogenous shock to the credit supply due to annual adjustments to conforming loan limits. By comparing the new limit effective in the current year to the old limit in the previous year, we segment loans in adjacent conforming and jumbo loan markets into three treated and two control groups. We then estimate the effects of loan limit changes on application, mortgage, housing, and other economic outcomes using a difference-in-difference identification strategy. We find strong evidence that increases in conforming loan limits lead to increases in credit supply in the newly eligible conforming loan market just above the old limit from 1996 through 2002 and in the jumbo market just above the new limit since 2002. There is a competitive effect on the lower-balanced conforming market due to borrowers in this group being induced to purchase more expensive homes as cheap credits become available. Consistently, the prices of these home purchase transactions financed by newly eligible conforming loans appreciate much more rapidly than for the control groups. We also find significant effects of increases in the loan limit on broad economic outcomes, such as home prices and employment growth.  
                                                                                                             

Introduction: