Targeted Government Intervention in the Housing Market 1

This paper estimates the effect of GSE elimination on the housing market. I solve a model for housing demand with borrowing constraints. GSE activity is modeled as an option for households to obtain low-interest mortgages that are smaller than the conforming limit. Households that benefit most from GSEs have either low life-time incomes or high wealth-to-income ratios. Elimination of GSE’s leads to a decrease in homeownership rate from 69% to 48% and a decrease in average homeowner leverage from 35% to 15%. I am grateful for the guidance, discussions, and encouragements from my primary co-advisors Monika Piazzesi and Martin Schneider. I would like to thank seminar audiences in the Stanford Macro Lunch for the helpful feedback. I thank the NSF for financial support under the Graduate Research Fellowship. I can be reached at [email protected].