The Role of Housing and Mortgage Markets in the Financial Crisis

Manuel Adelino, Antoinette Schoar () and Felipe Severino
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Manuel Adelino: Fuqua School of Business, Duke University, Durham, North Carolina 27708, USA
Antoinette Schoar: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142, USA

Annual Review of Financial Economics, 2018, vol. 10, issue 1, 25-41

Abstract: Ten years after the financial crisis of 2008, there is widespread agreement that the boom in mortgage lending and its subsequent reversal were at the core of the Great Recession. We survey the existing evidence, which suggests that inflated house-price expectations across the economy played a central role in driving both the demand for and the supply of mortgage credit before the crisis. The great misnomer of the 2008 crisis is that it was not a subprime crisis but rather a middle-class crisis. Inflated house-price expectations led households across all income groups, especially the middle class, to increase their demand for housing and mortgage leverage. Similarly, banks lent against increasing collateral values and underestimated the risk of defaults. We highlight how these emerging facts have essential implications for policy.

Keywords: financial crisis; housing; mortgage debt; subprime (search for similar items in EconPapers)
JEL-codes: D30 G21 R30 (search for similar items in EconPapers)
Date: 2018
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