Not All Bank Liquidity Creation Boosts Prices-The Case of the US Housing Market

This paper is about investigating how different bank liquidity creation activities affect housing markets. Using data of 401 metropolitan statistical areas/metropolitan statistical area divisions (MSAs/MSADs) of the U.S. between 1990 and 2018, we show that not all bank liquidity creation activities boost the housing markets. In particular, unlike assetside and off- balance sheet liquidity creations, funding-side liquidity creation dampens housing markets. The relationships between liquidity creation activities and housing markets are stronger in regions with inelastic house supply, but flip when banks face external liquidity shocks. We also find that housing markets dominated by large banks are more sensitive to off-balance sheet liquidity creation activities. Finally, as expected, asset-side and off-balance sheet liquidity creations boost housing markets by driving house prices away from fundamental values. Our results offer a more thorough explanation of how bank liquidity creation fuels the momentum of housing markets.