The Subprime Crisis and House Price Appreciation
William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
Smeal College of Business, The Pennsylvania State University
Yale School of Management
February 10, 2009
Yale ICF Working Paper No. 1340577
This paper argues that econometric analysis of housing price indexes before 2006 generated forecasts of future long-term price growth and low estimated probabilities of extreme price decreases. These forecasts of future increases in home-loan collateral values may have affected both the demand and the supply of mortgages. Standard time series models using repeat-sales indices suggested that positive trends had a long half-life. Expectations based on such models supported expectations that could lead to an asset bubble.
Analysis of data from the HMDA loan data base and LoanPerformance at the MSA level and at the loan level substantiates both supply and demand effects of past price trends in housing markets, particularly with respect to subprime mortgage applications and approvals. At the MSA level, past home price increases are associated with higher subprime applications and loan to value ratios. Approval probability of subprime loans was not affected by higher loan to value ratios. At the loan level, the approval probability of subprime applications is also positively associated with past home price appreciation. These results differ for prime mortgages.
Number of Pages in PDF File: 46
Date posted: February 11, 2009