Abstract

http://ssrn.com/abstract=1262365
 
 

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Subprime Lending and the Housing Bubble: Tail Wags Dog?


Major Coleman IV


Syracuse University - Whitman School of Management

Michael LaCour-Little


California State University at Fullerton

Kerry D. Vandell


University of California, Irvine - Paul Merage School of Business

September 2, 2008


Abstract:     
The cause of the "housing bubble" associated with the sharp rise and then drop in home prices over the period 1998-2008 has been the focus of significant policy and research attention. The dramatic increase in subprime lending during this period has been broadly blamed for these market dynamics. In this paper we empirically investigate the validity of this hypothesis vs. several other alternative explanations. A model of house price dynamics over the period 1998-2006 is specified and estimated using a cross-sectional time-series data base across 20 metropolitan areas over the period 1998-2006. Results suggest that prior to early 2004, economic fundamentals provide the primary explanation for house price dynamics. Subprime credit activity does not seem to have had much impact on subsequent house price returns at any time during the observation period, although there is strong evidence of a price-boosting effect by investor loans. However, we do find strong evidence that a credit regime shift took place in late 2003, as the GSE's were displaced in the market by private issuers of new mortgage products. Market fundamentals became insignificant in affecting house price returns, and the price-momentum conditions characteristic of a "bubble" were created. Thus, rather than causing the run-up in house prices, the subprime market may well have been a joint product, along with house price increases, (i.e., the "tail") of the changing institutional, political, and regulatory environment characteristic of the period after late 2003 (the "dog").

Number of Pages in PDF File: 45

Keywords: subprime, housing bubble

JEL Classification: G21, R21, R31

working papers series


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Date posted: September 3, 2008  

Suggested Citation

Coleman, Major and LaCour-Little, Michael and Vandell, Kerry D., Subprime Lending and the Housing Bubble: Tail Wags Dog? (September 2, 2008). Available at SSRN: http://ssrn.com/abstract=1262365 or http://dx.doi.org/10.2139/ssrn.1262365

Contact Information

Major Coleman IV
Syracuse University - Whitman School of Management ( email )
Syracuse, NY 13244
United States
Michael LaCour-Little
California State University at Fullerton ( email )
5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)
Kerry D. Vandell (Contact Author)
University of California, Irvine - Paul Merage School of Business ( email )
Irvine, CA California 92697-3125
United States
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