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Housing Market Price Tier Movements in an Expansion and Collapse


  • Steven Gjerstad

    () (Economic Science Institute, Chapman University)


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

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    References listed on IDEAS

    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.
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