Ebook Credit Supply and the Price of Housing
Are asset prices affected by investorsjaccess to credit? The answer is key to the modeling choices that underpin virtually any asset pricing model. A frictionless world implies drastically different pricing kernels than if credit constraints are empirically relevant. Asset prices become highly responsive to fundamentals if access to credit is constrained, and can overreact as demonstrated most prominently by Kiyotaki and Moore (1997). Yet a definitive answer is elusive, because of well known identification issues. The provision of credit is not an exogenous variable. It depends on asset prices themselves, because some of them can be used as collateral. In this paper, we identify exogenous shifts to competition in the banking sector, trace their effects on the size and standards of mortgage loans, and evaluate their end impact on house prices.
Identification rests on regulatory changes to bank branching in the U.S. We focus on post%1994 interstate branching deregulation. Even though interstate banking was fully legal with the passage of the Interstate Banking and Branching Eociency Act of 1994 (IBBEA), various restrictions have remained available for states to hamper interstate branching. For instance, states are allowed to put limits on banksjsize, implementing deposit or age restrictions that effectively prevent interstate branching. Thus, even after the passage of IBBEA, small and large banks have continued to struggle for the control of state level regulation, as Krozner and Strahan (1999) document they had prior to 1994.
Rice and Strahan (2009) (RS) have constructed an index capturing these effective regulatory constraints. They use the index to instrument the conditions of bank credit supply, and their end effect on firmsjfinancing choices. They show restrictions increase with the proportion of small banks in a state, and decrease with past growth performance. They find no systematic correlation with contemporaneous economic conditions, a result suggestive the index is abstracting from credit demand. Inasmuch as it focuses on politically driven changes in credit supply, the index provides a valuable empirical framework to trace the economic consequences of changes in the availability of credit. In this paper, we merge the deregulation episodes with county level information on mortgage loans and house prices. Since the index runs until 2005, we are able to inform recent developments in the U.S mortage and housing markets.
Like RS, Jayaratne and Strahan (1996), or many others, we implement a conventional treatment effect estimation, where identification obtains across states and over time. We use this framework to answer three questions: 1) how did branching deregulation impact the mortgage market, 2) did branching deregulation impact house prices, and 3) is the end effect on house prices channeled via a response of the mortgage market. Detailed information on the volume and terms of individual mortgage loans has been publicly available since the Home Mortgage Disclosure Act (HMDA), and we make extensive use of these data. County%level house price indexes, in turn, are compiled by Moodyjs Economy.com. We merge both data sources with RS index of branching deregulations.
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