Home construction financing and search frictions in the housing market

This paper studies the effects of financial frictions in construction on housing market dynamics. To this end, we build a search-theoretic model of the housing market in which there is endogenous entry of buyers and developers face credit constraints. We capture credit frictions by assuming that developers must search for financing before building a home à la Wasmer and Weil (2004) . Our model explores a novel channel that links credit frictions faced by developers to the housing market. We calibrate the model to quantify the size of the credit channel during the 2012–2019 housing market recovery. Through a series of counterfactuals, our model predicts that the credit channel had a large impact on housing liquidity, construction, and the vacancy rate. Furthermore, it accounts for around half of the rise in prices during the 2012-2019 housing market recovery.