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Boom-Bust Cycles in Housing: The Changing Role of Financial Structure

  • Calvin Schnure
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    Why are housing markets so prone to boom-bust cycles? The mortgage market structure prior to the Savings and Loan crisis contributed to the volatility in real housing activity which, in turn, amplified the volatility in housing prices. The subsequent development of a national, market-based system of securitized mortgage finance has damped this boom-bust cycle. We test whether deviations of actual housing prices from values forecast by a model based on economic fundamentals have responded to the change in financial structure, and find that pricing errors have fallen significantly since the mid-1980s. Tests of the relative importance of the change in financial market structure versus the reduction of inflation over this period indicate a primary role for market structure in improving pricing efficiency.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/200.

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    Length: 27
    Date of creation: 01 Oct 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/200
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    1. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
    2. Joshua Gallin, 2003. "The long-run relationship between house prices and income: evidence from local housing markets," Finance and Economics Discussion Series 2003-17, Board of Governors of the Federal Reserve System (U.S.).
    3. Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers 2813, C.E.P.R. Discussion Papers.
    4. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
    5. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
    6. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
    7. Edward L. Glaeser & Joseph Gyourko, 2003. "The impact of building restrictions on housing affordability," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 21-39.
    8. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    9. 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.
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