Does Collateral Value Affect Asset Prices? Evidence from a Natural Experiment in Texas

TL;DR

This study examines how the ability to pledge homes as collateral influences house prices, using a natural experiment in Texas that shows increased prices following legal changes, highlighting the role of collateral in household asset valuation.

Contribution

It provides causal evidence that collateral value impacts asset prices, specifically showing the effect of legal changes on house prices in Texas.

Findings

House prices increased by 4% after the law change.

Higher inelasticity, income, and pre-law prices amplified effects.

Richer households value collateral options more.

Abstract

Does the ability to pledge an asset as collateral, after purchase, affect its price? This paper identifies the impact of collateral service flows on house prices, exploiting a plausibly exogenous constitutional amendment in Texas which legalized home equity loans in 1998. The law change increased Texas house prices 4%; this is price-based evidence that households are credit-constrained and value home equity loans to facilitate consumption smoothing. Prices rose more in locations with inelastic supply, higher pre-law house prices, higher income, and lower unemployment. These estimates reveal that richer households value the option to pledge their home as collateral more strongly.