  Does the ability to pledge an asset as collateral, after purchase, affect its
price? This paper identifies the impact of collateral service flows on house
prices, exploiting a plausibly exogenous constitutional amendment in Texas
which legalized home equity loans in 1998. The law change increased Texas house
prices 4%; this is price-based evidence that households are credit-constrained
and value home equity loans to facilitate consumption smoothing. Prices rose
more in locations with inelastic supply, higher pre-law house prices, higher
income, and lower unemployment. These estimates reveal that richer households
value the option to pledge their home as collateral more strongly.
