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Household Leverage
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Journal Article
Household Leverage
2014
Overview
I propose a life-cycle model where a finitely lived risk-averse household finances its housing investment by opting to provide a down payment. Given that the household may default, risk-neutral lenders efficiently charge a default premium to hedge against expected losses. This has two major consequences. First, the higher the house price volatility, the higher the down payment the household provides to decrease the volatility of the equity share in the house. Second, in the presence of borrowing constraints, higher risk of unemployment persistence and/or a substantial drop in labor income decreases the leveraged position the household takes on.
