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How Did the US Housing Slump Begin? The Role of the 2005 Bankruptcy Reform

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  • von Lilienfeld-Toal, Ulf
  • Mookherjee, Dilip

Abstract

Most analyses of the recent financial crisis in the US focus on the consequences of the dramatic slump in housing prices that started in the mid-2000s, which led to rising mortgage defaults, shrinking home equity credit and liquidity in the banking system. Yet these accounts do not explain what caused the reversal of housing price growth in the first place. This paper argues that the passage of the 2005 Bankruptcy Reform Act (BAPCPA) contributed significantly to the reversal. The reform generated negative wealth effects for a category of homeowners, lowering prices of their homes, which spread via a process of contagion to the prices of other homes. Evidence consistent with this hypothesis is provided: changes in housing prices and mortgage interest rates at the MSA level following the reform were significantly correlated with BAPCPA-exposure. The results are robust to controls for the size of the pre-2005 price growth, local unemployment rates, rates of new home construction and home vacancies, apart from MSA, house and year dummies.

Suggested Citation

  • von Lilienfeld-Toal, Ulf & Mookherjee, Dilip, 2011. "How Did the US Housing Slump Begin? The Role of the 2005 Bankruptcy Reform," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48726, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc11:48726
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    References listed on IDEAS

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    1. Shleifer, Andrei & Vishny, Robert W, 1992. "Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
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    8. Wenli Li & Michelle J. White & Ning Zhu, 2011. "Did Bankruptcy Reform Cause Mortgage Defaults to Rise?," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 123-147, November.
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    Cited by:

    1. Corradin, Stefano & Gropp, Reint & Huizinga, Harry & Laeven, Luc, 2016. "The effect of personal bankruptcy exemptions on investment in home equity," Journal of Financial Intermediation, Elsevier, vol. 25(C), pages 77-98.
    2. Giovanni Favara, 2013. "Mortgage Market Concentration, Foreclosures and House Prices," 2013 Meeting Papers 643, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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