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Boom-Bust Cycles in Housing: The Changing Role of Financial Structure

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Author Info
Calvin Schnure
Abstract

Why are housing markets so prone to boom-bust cycles? The mortgage market structure prior to the Savings and Loan crisis contributed to the volatility in real housing activity which, in turn, amplified the volatility in housing prices. The subsequent development of a national, market-based system of securitized mortgage finance has damped this boom-bust cycle. We test whether deviations of actual housing prices from values forecast by a model based on economic fundamentals have responded to the change in financial structure, and find that pricing errors have fallen significantly since the mid-1980s. Tests of the relative importance of the change in financial market structure versus the reduction of inflation over this period indicate a primary role for market structure in improving pricing efficiency.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/200.

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Length: 27 pages
Date of creation: 27 Oct 2005
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Handle: RePEc:imf:imfwpa:05/200

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Keywords: Financial sector ; Financial stability ;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Edward L. Glaeser & Joseph Gyourko, 2003. "The impact of building restrictions on housing affordability," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 21-39. [Downloadable!]
  3. 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(2003-2), pages 299-362. [Downloadable!]
  4. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202. [Downloadable!]
  5. 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. [Downloadable!] (restricted)
    Other versions:
  6. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17. [Downloadable!]
  7. Jonathan Heathcote & Morris Davis, 2004. "The Price and Quantity of Residential Land in the United States," 2004 Meeting Papers 32, Society for Economic Dynamics.
    Other versions:
  8. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2001-1), pages 135-174. [Downloadable!]
  9. Joshua Gallin, 2003. "The long-run relationship between house prices and income: evidence from local housing markets," Finance and Economics Discussion Series 2003-17, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yoon Sook Kim & Paul S. Mills & Todd Groome & François Haas & John Kiff & Shinobu Nakagawa & Parmeshwar Ramlogan & Oksana Khadarina & Nicolas R. Blancher & William Lee, 2006. "The Limits of Market-Based Risk Transfer and Implications for Managing Systemic Risks," IMF Working Papers 06/217, International Monetary Fund. [Downloadable!]
  2. Isabel Vansteenkiste, 2007. "Regional housing market spillovers in the US - lessons from regional divergences in a common monetary policy setting," Working Paper Series 708, European Central Bank. [Downloadable!]
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