The Foreclosure-House Price Nexus: Lessons from the 2007-2008 Housing Turmoil

57 Pages Posted: 8 Sep 2008 Last revised: 24 Jul 2010

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Stanley D. Longhofer

Wichita State University - W. Frank Barton School of Business

William Miles

Wichita State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2008

Abstract

Despite housing's importance to the economy and worries about recent financial and economic turmoil traceable to housing market difficulties, little has been written on how distress in the housing market, measured by foreclosures, affects home prices, or how these variables interact with other macroeconomic or housing variables such as employment, housing permits or sales. Employing a panel VAR model to examine quarterly state-level data, our paper is the first to systematically analyze these interactions. There is substantial regional variation across states, which facilitates our ability to identify linkages among variables. Importantly, price-foreclosure linkages work in both directions; foreclosures have a significant, negative effect on home prices, while an increase in prices alleviates distress by lowering foreclosures. Similarly, employment and foreclosures have mutually negative effects on each other. The impact of foreclosures on prices, while negative and significant, is quite small in magnitude. We demonstrate this by simulating house price changes in response to extreme foreclosure shocks. Even under extremely pessimistic scenarios for foreclosure shocks, average U.S. house prices, as measured by the comprehensive OFHEO house price index (which we argue is the most reliable and useful measure of house prices to use for our purposes), likely would decline only slightly or remain essentially flat in response to foreclosures like those predicted for the 2008-2009 period. This suggests that home prices are quite sticky, and that fears of a major fall in house prices, with all of its attendant negative macroeconomic consequences, typically are not warranted even in extreme foreclosure circumstances.

Suggested Citation

Calomiris, Charles W. and Longhofer, Stanley D. and Miles, William, The Foreclosure-House Price Nexus: Lessons from the 2007-2008 Housing Turmoil (September 2008). NBER Working Paper No. w14294. Available at SSRN: https://ssrn.com/abstract=1264557

Charles W. Calomiris (Contact Author)

Columbia University - Columbia Business School ( email )

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Stanley D. Longhofer

Wichita State University - W. Frank Barton School of Business ( email )

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HOME PAGE: http://webs.wichita.edu/longhofer

William Miles

Wichita State University - Department of Economics ( email )

Wichita, KS 67260-0078
United States

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