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Endogenous Formation and Collapse Of Housing Bubbles

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  • Jiaqi Ge

Abstract

This paper develops an analytical framework and an agent-based spatial model of the housing market. We show that low down payment requirement will cause housing bubbles. With low down payment requirement, a small decrease in the housing price will cause mortgage rate to rise in response to the lowering value of collateral . The rising mortgage rate will further suppress demand and turn the market into a downward spiral. The agent-base model is based on our interviews with local real estate agents. The exploratory work in this paper will help us better understand the housing market, give policy advice, and eventually prevent another damaging housing bubble.

Suggested Citation

  • Jiaqi Ge, 2013. "Endogenous Formation and Collapse Of Housing Bubbles," Staff General Research Papers Archive 36277, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:36277
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    File URL: http://www2.econ.iastate.edu/papers/p16277-2013-07-08.pdf
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    References listed on IDEAS

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    1. Glaeser, Edward L. & Gyourko, Joseph & Saiz, Albert, 2008. "Housing supply and housing bubbles," Journal of Urban Economics, Elsevier, vol. 64(2), pages 198-217, September.
    2. Christopher Mayer, 2011. "Housing Bubbles: A Survey," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 559-577, September.
    3. Brueckner, Jan K. & Calem, Paul S. & Nakamura, Leonard I., 2012. "Subprime mortgages and the housing bubble," Journal of Urban Economics, Elsevier, vol. 71(2), pages 230-243.
    4. William Goetzmann & Liang Peng & Jacqueline Yen, 2012. "The Subprime Crisis and House Price Appreciation," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 36-66, January.
    5. Mary Riddel, 2011. "Are Housing Bubbles Contagious? A Case Study of Las Vegas and Los Angeles Home Prices," Land Economics, University of Wisconsin Press, vol. 87(1), pages 126-144.
    6. Goodman, Allen C. & Thibodeau, Thomas G., 2008. "Where are the speculative bubbles in US housing markets?," Journal of Housing Economics, Elsevier, vol. 17(2), pages 117-137, June.
    7. John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715, Cowles Foundation for Research in Economics, Yale University.
    8. Sheri Markose & Simone Giansante & Mateusz Gatkowski & Ali Rais Shaghaghi, 2010. "Too Interconnected To Fail: Financial Contagion and Systemic Risk In Network Model of CDS and Other Credit Enhancement Obligations of US Banks," Working Papers 033, COMISEF.
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