The Housing Boom and Bust: Model Meets Evidence

72 Pages Posted: 15 Aug 2017

See all articles by Greg Kaplan

Greg Kaplan

University of Chicago - Department of Economics

Kurt Mitman


Giovanni L. Violante

New York University, Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2017


We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.

Keywords: Consumption, Credit Conditions, Expectations, foreclosures, great recession, home ownership, House Prices, leverage, Long-Term Mortgages, Rental Markets

JEL Classification: E21, E30, E40, E51

Suggested Citation

Kaplan, Greg and Mitman, Kurt and Violante, Giovanni L., The Housing Boom and Bust: Model Meets Evidence (August 2017). CEPR Discussion Paper No. DP12215. Available at SSRN:

Greg Kaplan (Contact Author)

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

Kurt Mitman

IIES ( email )

Stockholm, SE-10691


Giovanni L. Violante

New York University, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-992-9771 (Phone)
212-995-4186 (Fax)

Centre for Economic Policy Research (CEPR)

United Kingdom

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