IDEAS home Printed from https://ideas.repec.org/p/chu/wpaper/09-01.html
   My bibliography  Save this paper

Housing Market Price Tier Movements in an Expansion and Collapse

Author

Listed:
  • Steven Gjerstad

    () (Economic Science Institute, Chapman University)

Abstract

The subprime mortgage crisis has done more damage to the financial system than any financial crisis since the depression. This paper examines the Federal Reserve’s expansionary monetary policy during the early part of this decade, the effect of that expansionary policy on mortgage market liquidity, the effects of that liquidity on housing price movements, and the way that those price movements contributed to the severity of the financial crisis. House prices increased most in the low-priced tier of the market during the expansion, which prompted lenders and investors in mortgage-backed securities to finance highly leveraged purchases in this segment of the market. But house prices also decline most in the low-priced tier during a contraction or collapse, among borrowers with inadequate assets and income to absorb the decline in their home values if forced to sell their homes. Consequently, their losses were transmitted into the financial sector, with an impact far more devastating than in any crisis since the depression. In order to address this structural vulnerability of the residential real estate market, several problems with incentives and information disclosure at almost every stage in the lending and securitization process need to be addressed, including the incentives of home buyers, loan originators, loan servicers, bond rating firms, investment banks, and credit enhancement providers. Alternatively, many of the problems with risk assessment may need to be transferred to investors, who have a clear incentive to gather information and assess risks, and can discipline lenders by directing capital to those lenders who adequately manage lending risks.

Suggested Citation

  • Steven Gjerstad, 2009. "Housing Market Price Tier Movements in an Expansion and Collapse," Working Papers 09-01, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:09-01
    as

    Download full text from publisher

    File URL: http://www.chapman.edu/ESI/wp/Gjerstad_HPITiers2009_01.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. François Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 459-485.
    2. David C. Wheelock, 2008. "The federal response to home mortgage distress: lessons from the Great Depression," Review, Federal Reserve Bank of St. Louis, issue May, pages 133-148.
    3. Morris A. Davis & Andreas Lehnert & Robert F. Martin, 2008. "The Rent-Price Ratio For The Aggregate Stock Of Owner-Occupied Housing," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(2), pages 279-284, June.
    4. Ernest M. Fisher, 1950. "Changing Institutional Patterns Of Mortgage Lending," Journal of Finance, American Finance Association, vol. 5(4), pages 307-315, December.
    5. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-137, March.
    6. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    7. Kristopher Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul Willen, 2008. "Making Sense of the Subprime Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 69-159.
    8. Balke, Nathan S & Gordon, Robert J, 1989. "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 38-92, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chu:wpaper:09-01. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Megan Luetje). General contact details of provider: http://edirc.repec.org/data/esichus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.