The Subprime Crisis and House Price Appreciation

Posted: 29 Nov 2011

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: November 15, 2011

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 indexes suggest that positive trends had a long-half-life. Expectations based on such models support expectations that could lead to an asset bubble.

Analysis of data from the HMDA loan database and LoanPerformance.com at the MSA level and at the loan level substantiates the effects of past price trends on the demand and supply of subprime mortgages. On the demand side, at the MSA level, past home price increases are associated with more subprime applications, higher loan to income ratios and lower loan to value ratios of applications for both prime and subprime mortgages. This is consistent with the notion that households not only borrowed more but also invested more in home equity conditional on greater past house price increases. On the supply side, past home price appreciation had a significantly greater impact on the approval rate of subprime applications than the approval rate of prime applications. Loan level analysis indicates that past home price appreciation increased the approval rate of subprime applications but did not affect the approval rate of prime applications. Further, approved HMDA subprime loans had higher loan to income ratios in MSAs with greater past house price trends.

Keywords: Mortgage, Subprime, House prices, Expectations

Suggested Citation

Goetzmann, William N. and Peng, Liang and Yen, Jacqueline, The Subprime Crisis and House Price Appreciation (November 15, 2011). Journal of Real Estate Finance and Economics, Vol. 44, Nos. 1 & 2, 2012. Available at SSRN: https://ssrn.com/abstract=1960146

William N. Goetzmann

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

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HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Liang Peng

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

University Park
State College, PA 16802
United States

Jacqueline Yen (Contact Author)

Yale School of Management ( email )

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

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