Lessons in Price Stability from the U.S. Real Estate Market Collapse

Abstract

The U.S. residential housing market collapse illustrates the consequences of ignoring risk while funding mortgage borrowing. Collateral over-valuation was a foundational piece of the crisis. Over the past few decades, secondary markets, securitization, policy and psychology increased the flow of funds into real estate. At the same time, financial market segmentation divorced risk from reward. Increased mortgage capital availability, unmitigated by proper risk allocation, led to real estate price inflation. Social trends and government policies exacerbated both the mortgage capital over-supply and the risk-valuation disconnect.

The Dodd-Frank Act inadequately addresses the underlying asset valuation problem. Federal regulation may support market stability systemically, but micro-level oversight and private rights of action more efficiently and effectively secure responsible mortgage pricing.

Keywords: Housing, Financial, Dodd-Frank, Mortgage-Backed, Securities, Securitization, Secondary Mortgage Market, Mortgage, Lender, Borrower, Broker, Housing, Homeownership, Capital Market, American Dream, Credit Rating Agency, Fannie Mae, Freddie Mac, Government Sponsored Enterprises, Appraisal, Leverage

JEL Classification: R2, P1, K00, K10, K11, K12, K13, J68, I31, H70, H63, H5, H31, H24, G21, G1, F01, D1, D6, D9, E1, E2,