The Subprime Crisis and House Price Appreciation

47 Pages Posted: 15 Sep 2009 Last revised: 12 Oct 2009

See all articles by William N. Goetzmann

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Liang Peng

Smeal College of Business, The Pennsylvania State University

Jacqueline Yen

Yale School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: September 2009

Abstract

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.com 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.

Suggested Citation

Goetzmann, William N. and Peng, Liang and Yen, Jacqueline, The Subprime Crisis and House Price Appreciation (September 2009). NBER Working Paper No. w15334. Available at SSRN: https://ssrn.com/abstract=1472272

William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Liang Peng

Smeal College of Business, The Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Jacqueline Yen

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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