Boom-Bust Cycles in Housing: The Changing Role of Financial Structure

Author/Editor:

Calvin Schnure

Publication Date:

October 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Why are housing markets so prone to boom-bust cycles? The mortgage market structure prior to the Savings and Loan crisis contributed to the volatility in real housing activity which, in turn, amplified the volatility in housing prices. The subsequent development of a national, market-based system of securitized mortgage finance has damped this boom-bust cycle. We test whether deviations of actual housing prices from values forecast by a model based on economic fundamentals have responded to the change in financial structure, and find that pricing errors have fallen significantly since the mid-1980s. Tests of the relative importance of the change in financial market structure versus the reduction of inflation over this period indicate a primary role for market structure in improving pricing efficiency.

Series:

Working Paper No. 2005/200

Subject:

Business cycles Economic growth Financial institutions Housing Housing prices Inflation Mortgages National accounts Prices

English

Publication Date:

October 1, 2005

ISBN/ISSN:

9781451862195/1018-5941

Stock No:

WPIEA2005200

Pages:

27

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