Credit Supply and House Prices: Evidence from Conforming Loan Limits

Citation:

Matthew Lilley and Gianluca Rinaldi. In Preparation. “Credit Supply and House Prices: Evidence from Conforming Loan Limits”.

Abstract:

The basic challenge in understanding the impact of credit on house prices is to separate supply and demand effects. We construct an instrument for mortgage credit supply by using county level changes in the conforming loan limit set by agencies. We estimate that an exogenous 1% increase in credit supply leads to a 0.38% increase in house prices. By focusing on transactions close to the border of differentially treated counties and since the conforming loan limits are only sporadically revised, we can plausibly rule out demand based explanations for our results.