The Housing Boom and Bust

The Housing Boom and Bust
Author: Thomas Sowell
Publisher: Basic Books (AZ)
Total Pages: 194
Release: 2009-05-12
Genre: Business & Economics
ISBN: 0465018807

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Explains how we got into the current economic disaster that developed out of the economics and politics of the housing boom and bust. The "creative" financing of home mortgages and "creative" marketing of financial securities based on these mortgages to countries around the world, are part of the story of how a financial house of cards was built up--and then collapsed.

Housing, Consumption, and Credit Constraints

Housing, Consumption, and Credit Constraints
Author: Andreas Lehnert
Publisher:
Total Pages: 72
Release: 2004
Genre: Consumption (Economics)
ISBN:

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"I test the credit-market effects of housing wealth shocks by estimating the consumption elasticity of house price shocks among households in different age quintiles. Younger households face faster expected income growth and hence would like to borrow more than older households. I estimate consumption elasticities from housing wealth by age quintile to be (4; 0; 3; 8; 3) percent. As predicted by theory, the youngest group has a higher elasticity of consumption than the next two age quintiles. That the consumption of the age quintile on the verge of retirement is responsive to housing wealth is also not surprising: I show that these households are likeliest to "downsize" their house and thus realize any capital gains"--Abstract.

The macroeconomic effects of housing wealth, housing finance, and limited risk-sharing in general equilibrium

The macroeconomic effects of housing wealth, housing finance, and limited risk-sharing in general equilibrium
Author: Jack Favilukis
Publisher:
Total Pages: 47
Release: 2010
Genre: Economics
ISBN:

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We study a two-sector general equilibrium model of housing and non-housing production where heterogenous households face limited opportunities to insure against aggregate and idiosyncratic risks. The model generates large variability in the national house price-rent ratio, both because it fluctuates endogenously with the state of the economy and because it rises in response to a relaxation of credit constraints and decline in housing transaction costs (financial market liberalization). These factors, together with a rise in foreign ownership of U.S. debt calibrated to match the actual increase over the period 2000-2006, generate an increase in the model price-rent ratio comparable to that observed in U.S. data over this period. The model also predicts a sharp decline in home prices starting in 2007, driven by the economic contraction and by a presumed reversal of the financial market liberalization. Fluctuations in the model's price-rent ratio are driven by changing risk premia, which fluctuate endogenously in response to cyclical shocks, the financial market liberalization, and its subsequent reversal. By contrast, we show that the inflow of foreign money into domestic bond markets plays a small role in driving home prices, despite its large depressing influence on interest rates. Finally, the model implies that procyclical increases in equilibrium price-rent ratios reflect rational expectations of lower future housing returns, not higher future rents.

The Homevoter Hypothesis

The Homevoter Hypothesis
Author: William A. Fischel
Publisher: Harvard University Press
Total Pages: 362
Release: 2009-07-01
Genre: Law
ISBN: 9780674036901

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Just as investors want the companies they hold equity in to do well, homeowners have a financial interest in the success of their communities. If neighborhood schools are good, if property taxes and crime rates are low, then the value of the homeowner’s principal asset—his home—will rise. Thus, as William Fischel shows, homeowners become watchful citizens of local government, not merely to improve their quality of life, but also to counteract the risk to their largest asset, a risk that cannot be diversified. Meanwhile, their vigilance promotes a municipal governance that provides services more efficiently than do the state or national government. Fischel has coined the portmanteau word “homevoter” to crystallize the connection between homeownership and political involvement. The link neatly explains several vexing puzzles, such as why displacement of local taxation by state funds reduces school quality and why local governments are more likely to be efficient providers of environmental amenities. The Homevoter Hypothesis thereby makes a strong case for decentralization of the fiscal and regulatory functions of government.

Essays in Finance and Welfare

Essays in Finance and Welfare
Author: Isaac Issa Hacamo
Publisher:
Total Pages: 104
Release: 2014
Genre:
ISBN:

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This dissertation explores the relationship between finance and welfare, focusing on how the expansion of credit supply in the beginning of the 2000s, leading to the 2007 financial crisis, affected U.S. households. This dissertation helps advance the study of how financial policies affect households' well- being. In the first chapter, I study the effect of access to credit on family structure. There is a large debate over the welfare effects of the early 2000s housing boom and bust. One potentially important welfare effect is the impact of mortgage credit expansion on family structure. Exploiting pre-housing boom variation on the distribution of old homeowners who live alone and are older than 65, I conduct within-county analysis with zip code level data to causally identify the effect of access to credit on fertility outcomes through a channel associated with a more efficient reallocation of the existing housing stock among households. I examine two other housing channels, house wealth gains and new construction, and show that the most relevant channel is the reallocation, which allows young households to access space by either moving to larger homes or achieving homeownership earlier in their life-cycle. A one standard deviation increase in reallocation leads to a 6.4% increase in fertility from 2000 to 2006. The same increase in house prices leads to only a 2.7% increase, and in new construction leads to a 1.5% decline in fertility from 2000 to 2006. I estimate that approximately 500,000 babies were born between 2000 and 2006 because of the reallocation channel. In the second chapter, I study the effect of housing demand on house prices through an interest rate channel. In the last housing boom, strong house price growth only lasted until 2005. Why did house price growth slowed down in 2006? This chapter studies the effect of interest rate changes on housing demand at the end of a housing boom and the subsequent effect on house prices. I use three different proxies for housing demand, based on Google search data on search terms likely to be used during the process of purchasing a home, such as "remax", "construction", or "real estate". A one- standard deviation increase in the change in interest in purchasing a home from 2005 to 2006, measured by the Google search volume, leads to a 0.4 standard deviation increase in contemporaneous house price growth. To identify the interest rate channel, I first compute a household income threshold for each county, defined as the necessary income to afford an interest-rate-only mortgage on a county's average loan in 2005. I then exploit the slope of the county's income distribution around this affordability threshold to estimate the fraction of households that, after an increase in mortgage interest rates from 2005 to 2006, could no longer afford to pay an interest-rate-only mort- gage. I use this fraction as an instrumental variable for housing demand. The IV beta is remarkably close to the OLS beta, and confirms the large effect of housing demand on house prices in 2006 through an interest rate channel. This chapter sheds light on the transition process between the housing boom in the 2000s and the subsequent financial crisis, and contributes to a better understanding of the impact of monetary policy on housing demand and house prices at the end of a housing boom.