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Subprime mortgages and the housing bubble

Author

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  • Brueckner, Jan K.
  • Calem, Paul S.
  • Nakamura, Leonard I.

Abstract

This paper explores the link between the house-price expectations of mortgage lenders and the extent of subprime lending. It argues that bubble conditions in the housing market are likely to spur subprime lending, with favorable price expectations easing the default concerns of lenders and thus increasing their willingness to extend loans to risky borrowers. Since the demand created by subprime lending feeds back onto house prices, such lending also helps to fuel an emerging housing bubble. These ideas are illustrated in a theoretical model, and tentative support is found in empirical work exploring the connection between price expectations and the extent of subprime lending.

Suggested Citation

  • Brueckner, Jan K. & Calem, Paul S. & Nakamura, Leonard I., 2012. "Subprime mortgages and the housing bubble," Journal of Urban Economics, Elsevier, vol. 71(2), pages 230-243.
  • Handle: RePEc:eee:juecon:v:71:y:2012:i:2:p:230-243
    DOI: 10.1016/j.jue.2011.09.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Subprime; Default; Mortgage; Bubble;

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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