What Drove the 2003-2006 House Price Boom and Subsequent Collapse? Disentangling Competing Explanations
62 Pages Posted: 8 Dec 2018
Date Written: November 13, 2018
Ten years after the financial crisis, competing and often contradictory narratives have arisen around the central question of what can explain the massive rise and fall in house prices around the crisis. We provide a unified framework and use detailed cross-sectional data to examine four variants of the excess credit supply channel and three variants of the speculation channel that have been proposed in the literature. Although many proposed variables correlate well with house price patterns across regions, far fewer are consistently related to zip code level variation within regions both in the boom and the bust. The two variables that are selected by Bayesian model averaging as showing the strongest statistical and economic relation to house price changes, both in the boom and bust, are subprime lending and dubious origination practices. Surprisingly, none of the speculation measures including several possible extrapolative expectation proxies, explain zip code level house price growth variation within regions in both the boom and the bust. The effects of subprime lending and dubious origination are positively related to subsequent housing speculation and housing demand more generally. Inconsistent with lender expectations of future house price increases, credit supply is not correlated with house price growth in areas of elastic land supply; however, credit supply still predicts speculation growth, house transaction volume, and house price declines after the boom. Through both agency and non-agency loans, dubious lending practices seem to increase credit, and the effects of dubious lending are amplified in areas with likely income misreporting. Overall, our findings suggest that excess credit supply, particularly through subprime and dubious mortgage origination, stimulated housing demand and played a large role in the crisis.
Keywords: financial crisis, house price growth, credit supply, mortgage misreporting, housing demand, speculation
JEL Classification: G01, G21, R31
Suggested Citation: Suggested Citation