We use exogenous changes in the conforming loan limit to measure the causal effect of lower cost of financing on house prices. Houses that become eligible for cheaper funding through a conforming loan, increase in value by about 1.2 dollars per sqft. This implies a local elasticity of house prices to interest rates below 10, significantly lower than some earlier studies proposed. The results are larger in magnitude in the first half of our sample (1998-2001) when other forms of financing were less ubiquitous. Cheaper credit also has a stronger effect in zip codes with low personal income growth or lower elasticity of housing supply. Overall, lower mortgage rates have modest effects on average house prices, but have a strong impact on particularly constrained households.
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