Credit cycles with market-based household leverage

We develop a general equilibrium model in which households’ mortgage leverage is determined by supply and demand forces, where the price of credit impacts quantity households choose. Mortgages are supplied financial intermediaries, who offer menu contracts whose pricing varies with intermediaries’ equity capital. In model, growth for safe assets that replicates falling interest rates 2000s causes an empirically realistic boom household borrowing, debt-financed consumption, house prices. This results larger bust asset prices borrowing future crises.