Reassessing the 2000s Housing Cycle After Two Decades of Research

What caused the 2000s housing cycle? This article synthesizes two decades of research, including reduced-form empirics and structural models. Although often contentious, the literature coheres once one accounts for each study’s timing, place, methodology, and measurement. The cycle was a perfect storm that occurred in distinct stages. Starting in the late 1990s, fundamentals improved, and credit supply increased across the income distribution due to automated underwriting and financial deregulation. In the early 2000s, a decline in interest rates was followed by a further expansion in securitized and subprime credit, the origin of which remains controversial. This sequence of shocks produced a persistent boom that triggered two shifts in beliefs: average expectations became overly optimistic, pushing prices higher, and expectations diverged, fueling speculation. In the bust, prices overshot primarily due to mortgage defaults, which removed buyers and contracted credit supply. How these forces interact and how expectations form require further research.