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The Subprime Crisis and House Price Appreciation

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  • William N. Goetzmann
  • Liang Peng
  • Jacqueline Yen

Abstract

This paper argues that econometric analysis of housing price indexes before 2006 generated forecasts of future long-term price growth and low estimated probabilities of extreme price decreases. These forecasts of future increases in home-loan collateral values may have affected both the demand and the supply of mortgages. Standard time series models using repeat-sales indices suggested that positive trends had a long half-life. Expectations based on such models supported expectations that could lead to an asset bubble. Analysis of data from the HMDA loan data base and LoanPerformance.com at the MSA level and at the loan level substantiates both supply and demand effects of past price trends in housing markets, particularly with respect to subprime mortgage applications and approvals. At the MSA level, past home price increases are associated with higher subprime applications and loan to value ratios. Approval probability of subprime loans was not affected by higher loan to value ratios. At the loan level, the approval probability of subprime applications is also positively associated with past home price appreciation. These results differ for prime mortgages.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15334.

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Date of creation: Sep 2009
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Handle: RePEc:nbr:nberwo:15334

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Cited by:
  1. Paolo Gelain & Kevin J. Lansing & Caterina Mendicino, 2012. "House prices, credit growth, and excess volatility: implications for monetary and macroprudential policy," Working Paper Series 2012-11, Federal Reserve Bank of San Francisco.
  2. Carson, Richard T & Dastrup, Samuel R., 2009. "After the Fall: An Ex Post Characterization of Housing Price Declines Across Metropolitan Areas," University of California at San Diego, Economics Working Paper Series qt7ng9d927, Department of Economics, UC San Diego.
  3. Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Working Papers 17301, National Bureau of Economic Research, Inc.
  4. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2010. "Complex mortgages," Working Paper Series WP-2010-17, Federal Reserve Bank of Chicago.
  5. Paolo Gelain & Kevin J. Lansing, 2013. "House prices, expectations, and time-varying fundamentals," Working Paper 2013/05, Norges Bank.
  6. William Goetzmann & Frank Newman, 2010. "Securitizations in the 1920's," Yale School of Management Working Papers amz2668, Yale School of Management.
  7. Fernando Ferreira & Joseph Gyourko, 2011. "Anatomy of the Beginning of the Housing Boom: U.S. Neighborhoods and Metropolitan Areas, 1993-2009," NBER Working Papers 17374, National Bureau of Economic Research, Inc.
  8. Nakamura, Leonard I., 2014. "Brewing bubbles: how mortgage practices intensify housing booms," Business Review, Federal Reserve Bank of Philadelphia, issue 1, pages 16-24.
  9. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs E:47/2012, Bank of Finland.
  10. Jörg Bibow, 2010. "Alternative Strategien der Budgetkonsolidierung in Österreich nach der Rezession," IMK Studies 03-2010, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  11. W. Scott Frame & Lawrence J. White, 2014. "Technological Change, Financial Innovation, and Diffusion in Banking," Working Papers 14-02, New York University, Leonard N. Stern School of Business, Department of Economics.
  12. Huang, MeiChi, 2014. "Bubble-like housing boom–bust cycles: Evidence from the predictive power of households’ expectations," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 2-16.
  13. Michael Brocker & Christopher Hanes, 2013. "The 1920s American Real Estate Boom and the Downturn of the Great Depression: Evidence from City Cross Sections," NBER Chapters, in: Housing and Mortgage Markets in Historical Perspective National Bureau of Economic Research, Inc.
  14. Jaison R. Abel & Richard Deitz, 2012. "How severe was the credit cycle in the New York-northern New Jersey region?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 18(Nov).
  15. Jiaqi Ge, 2013. "Endogenous Formation and Collapse Of Housing Bubbles," Staff General Research Papers 36277, Iowa State University, Department of Economics.
  16. Ge, Jiaqi, 2013. "Endogenous Rise and Collapse of Housing Prices," Staff General Research Papers 36279, Iowa State University, Department of Economics.

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