Revisiting the boom-bust cycle of housing in the 2000s
Chodorow-Reich et al. introduce a “neo-Kindlebergerian” model of a fundamentally rooted house price cycle in which belief over-reaction amplifies the boom and a foreclosure spiral exacerbates the bust. Their model includes two key elements: agents with over-optimistic expectations and mortgage borrowing and foreclosures. The estimated model generates the boom-bust-rebound from a single fundamental shock and quantitatively matches the cross-city patterns observed in the U.S. from 1997 to 2019. In particular,
[T]he boom results from over-optimism about an increase in the “dividend” growth rate, the bust ensues when beliefs of home buyers and lenders correct, exacerbated by a price-foreclosure spiral that pushes prices below their full-information level, and eventually a rebound emerges as the economy converges to a price path commensurate with fundamental growth. We also acknowledge other features of the episode, including changes in credit supply and speculation, but conclude that these forces cannot substitute for the role of fundamentals as a driving force.
The 2000s Housing Cycle With 2020 Hindsight: A Neo-Kindlebergerian View
Authors: Gabriel Chodorow-Reich, Adam M. Guren, and Timothy J. McQuade
From: Harvard University, University of California, Berkeley, Boston University
Why did housing markets behave differently during COVID?
During COVID house prices in the US, the UK, France, and Germany rose sharply, unexpectedly. Duca et al. in this paper provide further support to Chodorow-Reich et al.’s theory on what drives the boom-bust cycle in housing markets. They list five reasons why the housing markets in advanced economies behaved differently during COVID:
- Use of unconventional and conventional monetary policy to lower long-term interest rates;
- Imposition of moratoria on foreclosures/home repossessions and renter evictions;
- Aggressive modification of mortgages to prevent defaults;
- Large transfer payments to households, the unemployed and furloughed workers coupled with significant credit support to firms, and (in some countries) employment subsidies that buttressed household income.
What drives house prices: Some lessons from the literature
By: John Duca, John Muellbauer, Anthony Murphy – Federal Reserve Bank of Dallas, Oxford University
