The Housing Boom and Bust: Model Meets Evidence

Giovanni Violante, Greg Kaplan and Kurt Mitman

No 12215, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that 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.

Keywords: Consumption; Credit conditions; Expectations; Foreclosures; Great recession; Home ownership; House prices; Leverage; Long-term mortgages (search for similar items in EconPapers)
JEL-codes: E21 E30 E40 E51 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (89)

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Related works:
Journal Article: The Housing Boom and Bust: Model Meets Evidence (2020)
Working Paper: The Housing Boom and Bust: Model Meets Evidence (2017)
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