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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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  • Karl Case & John Quigley, 2008. "How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks through Financial Markets," European Journal of Housing Policy, Taylor and Francis Journals, vol. 8(2), pages 161-180.
  • Handle: RePEc:taf:eurjhp:v:8:y:2008:i:2:p:161-180 DOI: 10.1080/14616710802037383
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    1. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-34.
    2. Edward E. Leamer, 2007. "Housing is the business cycle," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 149-233.
    3. David L. Wickens & Ray R. Foster, 1937. "Non-Farm Residential Construction, 1920-1936," NBER Books, National Bureau of Economic Research, Inc, number wick37-1.
    4. Karl E. Case & Robert J. Shiller, 1988. "The behavior of home buyers in boom and post-boom markets," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 29-46.
    5. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, pages 1233-1260.
    6. Robert J. Shiller, 2007. "Understanding recent trends in house prices and homeownership," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 89-123.
    7. 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.
    8. Zarnowitz, Victor, 1992. "Business Cycles," National Bureau of Economic Research Books, University of Chicago Press, number 9780226978901.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
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    Cited by:

    1. Escobari, Diego & Jafarinejad, Mohammad, 2016. "Date stamping bubbles in Real Estate Investment Trusts," The Quarterly Review of Economics and Finance, Elsevier, vol. 60(C), pages 224-230.
    2. Cynthia A. Bansa & Martha A. Starr, 2011. "Distributional costs of the housing-price bust," Working Papers 2011-04, American University, Department of Economics.
    3. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, pages 203-217.
    4. Luciana Kabello Koprencka, 2014. "Factorial Analysis of Albanian Housing Market," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, pages 127-144.
    5. Glaeser, Edward L., 2014. "Understanding housing: The intellectual legacy of John Quigley," Regional Science and Urban Economics, Elsevier, vol. 47(C), pages 3-12.
    6. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2013. "Wealth Effects Revisited 1975-2012," Critical Finance Review, now publishers, vol. 2(1), pages 101-128, July.
    7. Michael Brocker & Christopher Hanes, 2014. "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, pages 161-201 National Bureau of Economic Research, Inc.
    8. Tsung-Hsien Michael Lee & Wenjuan Chen, 2015. "Is There an Asymmetric Impact of Housing on Output?," SFB 649 Discussion Papers SFB649DP2015-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    9. Robert Hill, 2013. "How Can One Tell When the Housing Market Is Out of Equilibrium?," ERES eres2013_59, European Real Estate Society (ERES).
    10. Case, Karl E. & Quigley, John M., 2009. "How Housing Busts End: Home Prices, User Cost, and Rigidities During Down Cycles," Berkeley Program on Housing and Urban Policy, Working Paper Series qt6mh9m4ff, Berkeley Program on Housing and Urban Policy.
    11. Jaume Roig Hernando, 2016. "Humanizing Finance by Hedging Property Values," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 9(2), pages 1-11, June.
    12. Karl E. Case & John M. Quigley & Robert J. Shiller, 2011. "Wealth Effects Revisited 1978-2009," Cowles Foundation Discussion Papers 1784, Cowles Foundation for Research in Economics, Yale University.
    13. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, vol. 66(2), pages 75-89, September.
    14. Simone Salotti, 2010. "An appraisal of the wealth effect in the US: evidence from pseudo-panel data," Working Papers - Mathematical Economics 2010-06, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    15. Salotti, Simone, 2009. "Wealth effect in the US: evidence from brand new micro-data," MPRA Paper 17732, University Library of Munich, Germany.
    16. Robert J. Shiller, 2008. "Derivatives Markets for Home Prices," Cowles Foundation Discussion Papers 1648, Cowles Foundation for Research in Economics, Yale University.
    17. Simone Salotti, 2012. "Wealth Effects in the US: Evidence from the Combination of Two Surveys," The Economic and Social Review, Economic and Social Studies, vol. 43(1), pages 67-98.
    18. Craig A. Depken & Harris Hollans & Steve Swidler, 2011. "Flips, flops and foreclosures: anatomy of a real estate bubble," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(1), pages 49-65, April.
    19. Simone Salotti, 2010. "An appraisal of the wealth effect in the US: evidence from pseudo-panel data," Working Papers - Mathematical Economics 2010-06, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    20. Karl E. Case, 2008. "The Central Role of Home Prices in the Current Financial Crisis: How Will the Market Clear?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 161-193.
    21. Turner, Tracy M. & Luea, Heather, 2009. "Homeownership, wealth accumulation and income status," Journal of Housing Economics, Elsevier, vol. 18(2), pages 104-114, June.

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