Housing Collateral Scarcity and Recessions: An Empirical Perspective

In this paper, we investigate the dynamic link between the scarcity of housing collateral and economic recessions in the US. First, we use vector error-correction models to identify negative transitory shocks to collateralizable housing wealth, which are used as proxies of housing collateral scarcity. We then use probit models and time-varying transition-probability Markov-switching autoregressive models to investigate how the housing collateral scarcity affects the probability of recession. Using several measures of housing wealth, we find that the probability of economic downturns increases when the housing collateral is scarce, and that an increase in housing collateral scarcity may push the economy from expansion to recession.