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Distributional Costs of Housing-price Bubbles: Who pays the Price when Bubbles Deflate?

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  • Cynthia Bansak
  • Martha A. Starr

Abstract

In considering whether asset-price bubbles should be offset through policy, an important issue is who pays the price when the bubble bursts. A bust that reduces the wealth of well-off households only may have small welfare costs, but costs may be sizable if broad swaths of households are affected. This paper uses micro data on millions of households from the US American Community Survey to examine how the bursting of the 1998--2006 housing bubble affected households’ employment, homeownership, home values, and housing costs. To separate dynamics of the housing bust from those of the aggregate downturn, we differentiate between metropolitan areas that did and did not experience bubbles. We find that, for most measures, deteriorations in well-being were more severe in bubble metros than elsewhere, and for several measures, differential effects on less-educated households were also more severe. This underscores the importance of leaning against broad-based housing bubbles via appropriate policies, as burdens of adjustment fall differentially on people not well prepared to bear them.

Suggested Citation

  • Cynthia Bansak & Martha A. Starr, 2015. "Distributional Costs of Housing-price Bubbles: Who pays the Price when Bubbles Deflate?," Review of Social Economy, Taylor & Francis Journals, vol. 73(4), pages 341-369, December.
  • Handle: RePEc:taf:rsocec:v:73:y:2015:i:4:p:341-369
    DOI: 10.1080/00346764.2015.1089108
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