The Regime Shift Associated with the 2004–2008 US Housing Market Bubble

James Tan and Siew Ann Cheong

PLOS ONE, 2016, vol. 11, issue 9, 1-8

Abstract: The Subprime Bubble preceding the Subprime Crisis of 2008 was fueled by risky lending practices, manifesting in the form of a large abrupt increase in the proportion of subprime mortgages issued in the US. This event also coincided with critical slowing down signals associated with instability, which served as evidence of a regime shift or phase transition in the US housing market. Here, we show that the US housing market underwent a regime shift between alternate stable states consistent with the observed critical slowing down signals. We modeled this regime shift on a universal transition path and validated the model by estimating when the bubble burst. Additionally, this model reveals loose monetary policy to be a plausible cause of the phase transition, implying that the bubble might have been deflatable by a timely tightening of monetary policy.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0162140

DOI: 10.1371/journal.pone.0162140

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