Leaning against housing booms fueled by credit

Carlos Cañizares Martínez

No 513, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: The aim of this paper is to empirically identify the state of the US housing market and to set state-dependent policy rules to smooth the housing cycle. I do so by estimating a three states Markov-switching model of housing prices in which mortgage debt is the state-dependent variable. As a result, the housing market state might be classified as being in housing booms fueled by credit, normal or implosion times. Second, I propose a state-contingent policy rule fed with the probabilities of being in each state. I apply such rule to set a housing countercyclical capital buffer (SCCyB) and a time-varying home mortgage interest deduction rule. Finally, I show that such rules have forecasting ability to predict the charge-off rates on real estate residential loans. The significance of this study is that it informs policymakers about the state of the housing market mechanically while it also provides a simple rule that allows the implementation of state-contingent macroprudential policy. Further, the structure of such rule is general enough to be applied to other policy tools.

Keywords: Housing prices; non-linear modeling; Markov switching model; housing demand; household debt; macroprudential policy. (search for similar items in EconPapers)
JEL-codes: C22 C24 G51 R21 R31 (search for similar items in EconPapers)
Pages: 33
Date: 2023-02
New Economics Papers: this item is included in nep-ure
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Working Paper: Leaning against housing booms fueled by credit (2023)
Working Paper: Leaning against housing booms fueled by credit (2023)
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