House prices and credit constraints: making sense of the U.S. experience

Most U.S. house price models break down in the mid-2000s due to the omission of exogenous changes in mortgage credit supply (associated with the subprime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time homebuyers. 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.