Leverage and house-price dynamics in US cities

We use city-level data to analyze the relationship between homeowner borrow ing patterns and house-price dynamics. Our principal finding is that in cit ies were a greater fraction of homeowners are highly leveraged-i.e., have h igh loan-to-value ratios-house prices react more sensitively to city-specif ic shocks, such as changes in per-capita income. This finding is consistent with recent theories that emphasize the role of borrowing in shaping the b ehavior of asset prices.