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How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks through Financial Markets

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  • Karl Case
  • John Quigley

Abstract

This paper considers dynamics in the reversal of booms in the housing market. We analyze three related mechanisms which govern the propagation of changes in the housing market throughout the rest of an advanced economy: wealth effects, income effects, and effects through financial markets. As the decade-long boom in the US housing market unwinds, we anticipate that there will be small wealth effects transmitted to the economy, but there will be large income effects affecting the rest of the economy and substantial financial market effects. If the current decline in housing starts and residential investment echoes the declines of the last three housing downturns, we estimate that gross national product (GNP) growth will be reduced by close to 3 per cent. Beyond the decline in housing investment, the recent turmoil in financial markets makes a recession induced by housing market conditions increasingly likely.

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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal European Journal of Housing Policy.

Volume (Year): 8 (2008)
Issue (Month): 2 ()
Pages: 161-180

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Handle: RePEc:taf:eurjhp:v:8:y:2008:i:2:p:161-180

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Related research

Keywords: Housing cycles; residential investment; recession;

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References

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  1. Robert J. Shiller & Karl E. Case, 1988. "The Behavior of Home Buyers in Boom and Post-Boom Markets," Cowles Foundation Discussion Papers 890, Cowles Foundation for Research in Economics, Yale University.
  2. Karl E. Case, John M. Quigley, Robert J. Shiller., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Economics Working Papers E01-308, University of California at Berkeley.
  3. Edward E. Leamer, 2007. "Housing IS the Business Cycle," NBER Working Papers 13428, National Bureau of Economic Research, Inc.
  4. Robert J. Shiller, 2007. "Understanding Recent Trends in House Prices and Home Ownership," NBER Working Papers 13553, National Bureau of Economic Research, Inc.
  5. Moses Abramovitz, 1964. "Evidences of Long Swings in Aggregate Construction Since the Civil War," NBER Books, National Bureau of Economic Research, Inc, number abra64-1.
  6. Richard K. Green & Susan M. Wachter, 2007. "The housing finance revolution," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 21-67.
  7. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc.
  8. Dwight M. Jaffee & John M. Quigley, 1975. "Housing Policy, Mortgage Policy, and the Federal Housing Administration," NBER Chapters, in: Measuring and Managing Federal Financial Risk, pages 97-125 National Bureau of Economic Research, Inc.
  9. David L. Wickens & Ray R. Foster, 1937. "Non-Farm Residential Construction, 1920-1936," NBER Books, National Bureau of Economic Research, Inc, number wick37-1.
  10. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
  11. David L. Wickens & Ray R. Foster, 1937. "Non-Farm Residential Construction, 1920-1936," NBER Chapters, in: Non-Farm Residential Construction, 1920-1936, pages 1-20 National Bureau of Economic Research, Inc.
  12. Zarnowitz, Victor, 1992. "Business Cycles," National Bureau of Economic Research Books, University of Chicago Press, number 9780226978901, янваÑ.
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