Real Estate Economics

Even after the end of the recent Great Recession period, U.S. housing prices and real estate loans continued to decline, while the uncertainty associated with the housing market remained elevated. This paper shows that an increase in uncertainty with respect to housing demand, i.e. a time-varying second moment of housing preferences, generates these dynamics and implies adverse effects for key macroeconomic aggregates such as output and consumption: An increase in housing preference volatility dampens housing prices which reduces the collateral value, borrowing activity and translates to a decrease in aggregate economic activity. Finally, we find these results to be broadly in line with the data.