The Housing Boom and Bust: Model Meets Evidence

Greg Kaplan, Kurt Mitman and Giovanni L. Violante

Journal of Political Economy, 2020, vol. 128, issue 9, 3285 - 3345

Abstract: We build a model of the US economy with multiple aggregate shocks that generate fluctuations in equilibrium house prices. Through counterfactual experiments, we study the housing boom-bust around the Great Recession, with three main results. First, the main driver of movements in house prices and rents was a shift in beliefs, not a change in credit conditions. Second, the boom-bust in house prices explains half of the corresponding swings in nondurable expenditures through a wealth effect. Third, a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.

Date: 2020
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Working Paper: The Housing Boom and Bust: Model Meets Evidence (2017)
Working Paper: The Housing Boom and Bust: Model Meets Evidence (2017)
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