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Drivers of the great housing boom‐bust: Credit conditions, beliefs, or both?

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  • Josue Cox
  • Sydney C. Ludvigson

Abstract

Two potential driving forces of house price fluctuations are commonly cited: credit conditions and beliefs. We posit some simple empirical calculations using direct measures of credit conditions and beliefs to consider their potentially distinct roles in house price fluctuations at the aggregate level. Changes in credit conditions are positively related to the fraction of riskier nonconforming debt in total mortgage lending, while measures of beliefs are unrelated to this ratio. Credit conditions explain quantitatively large magnitudes of the variation in quarterly house price growth and also predict future house price growth. Beliefs bear some relation to contemporaneous house price growth but have little predictive power. A structural vector autoregression analysis implies that exogenous changes in credit conditions have quantitatively important dynamic causal effects on house price changes.

Suggested Citation

  • Josue Cox & Sydney C. Ludvigson, 2021. "Drivers of the great housing boom‐bust: Credit conditions, beliefs, or both?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(3), pages 843-875, September.
    • Handle: RePEc:bla:reesec:v:49:y:2021:i:3:p:843-875
    DOI: 10.1111/1540-6229.12303
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    Cited by:

    1. Choi, Chi-Young & Hansz, J. Andrew, 2021. "From banking integration to housing market integration - Evidence from the comovement of U.S. Metropolitan House Prices," Journal of Financial Stability, Elsevier, vol. 54(C).
    2. Margaret Jacobson, 2019. "Beliefs, Aggregate Risk, and the U.S. Housing Boom," 2019 Meeting Papers 1549, Society for Economic Dynamics.
    3. Guangyang Chen & Kai Dong & Shaonan Wang & Xiuli Du & Ronghua Zhou & Zhongwei Yang, 2022. "The Dynamic Relationship among Bank Credit, House Prices and Carbon Dioxide Emissions in China," IJERPH, MDPI, vol. 19(16), pages 1-18, August.
    4. Tom Cusbert, 2023. "The Effect of Credit Constraints on Housing Prices: (Further) Evidence from a Survey Experiment," RBA Research Discussion Papers rdp2023-01, Reserve Bank of Australia.

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