The Consequences of the Housing Boom on Local Government Debt∗

Using a novel dataset on local government debt and house prices in California, this paper finds that the rise in house prices caused an expansion in local governments debt in the early 2000s. The elasticity between local government debt and house prices, estimated using cross-sectional variation in the share of developable land from Saiz (2010), suggest that a percentage point rise in house prices in a given county beyond the long-term trend is associated with a 0.44 percentage point rise in debt of local governments within the county. JEL: G23, H20, H71, H74, R30, R53 ∗I am deeply grateful to Monika Piazzesi, John Shoven, Chris Tonetti, Rebecca Diamond and Martin Schneider for their guidance and support of this project and thank the participants of the Macro seminar at Stanford University for their helpful comments and suggestions. I also appreciate the assistance and answers on local government finances from the personnel at CDIAC, Santa Clara County and the City of San Jose Budget Office. †Department of Economics, Stanford University. Email: [email protected].