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Distributional costs of the housing-price bust

  • Cynthia A. Bansa
  • Martha A. Starr

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 from the American Community Survey to examine how the recent housing bust 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 keeping housing markets from overheating, as burdens of adjustment fall differentially on people not well prepared to bear them.

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File URL: http://american.edu/cas/economics/pdf/upload/2011-4.pdf
File Function: First version, 2011
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Paper provided by American University, Department of Economics in its series Working Papers with number 2011-04.

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Date of creation: Mar 2011
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Handle: RePEc:amu:wpaper:2011-04
Contact details of provider: Web page: http://www.american.edu/cas/economics/

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