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The Subprime Crisis and House Price Appreciation

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Author Info
William N. Goetzmann
Liang Peng
Jacqueline Yen

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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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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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G01 - Financial Economics - - General - - - Financial Crises

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This page was last updated on 2009-12-5.

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