Credit Supply and House Prices : Evidence from Mortgage Market Segmentation

We develop a new instrument to analyze how exogenous changes in mortgage rates affect house values. Our instrument combines annual changes in the conforming loan limit (CLL) with the 80% loan-to-value threshold, which is commonly used in the approval of conforming loans. Houses that become eligible for cheaper funding through the CLL increase in value by about $1/sq ft. This estimate implies a local elasticity of house prices to interest rates below 6, a value significantly lower than earlier studies have proposed