The Housing Boom and Bust: Model Meets Evidence
70 Pages Posted: 28 Sep 2017
Date Written: August 4, 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: Suggested Citation