Can Cheap Credit Explain the Housing Boom?

68 Pages Posted: 2 Aug 2010 Last revised: 7 May 2015

See all articles by Edward L. Glaeser

Edward L. Glaeser

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)

Joshua D. Gottlieb

University of British Columbia (UBC) - Vancouver School of Economics; National Bureau of Economic Research (NBER)

Joseph Gyourko

University of Pennsylvania - Real Estate Department; National Bureau of Economic Research (NBER)

Date Written: July 2010

Abstract

Between 1996 and 2006, real housing prices rose by 53 percent according to the Federal Housing Finance Agency price index. One explanation of this boom is that it was caused by easy credit in the form of low real interest rates, high loan-to-value levels and permissive mortgage approvals. We revisit the standard user cost model of housing prices and conclude that the predicted impact of interest rates on prices is much lower once the model is generalized to include mean-reverting interest rates, mobility, prepayment, elastic housing supply, and credit-constrained home buyers. The modest predicted impact of interest rates on prices is in line with empirical estimates, and it suggests that lower real rates can explain only one-fifth of the rise in prices from 1996 to 2006. We also find no convincing evidence that changes in approval rates or loan-to-value levels can explain the bulk of the changes in house prices, but definitive judgments on those mechanisms cannot be made without better corrections for the endogeneity of borrowers' decisions to apply for mortgages.

Suggested Citation

Glaeser, Edward L. and Gottlieb, Joshua D. and Gyourko, Joseph E., Can Cheap Credit Explain the Housing Boom? (July 2010). NBER Working Paper No. w16230. Available at SSRN: https://ssrn.com/abstract=1651415

Edward L. Glaeser (Contact Author)

Harvard University - Department of Economics ( email )

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Joshua D. Gottlieb

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Joseph E. Gyourko

University of Pennsylvania - Real Estate Department ( email )

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