Boom-Bust Cycles in Housing: The Changing Role of Financial Structure
October 1, 2005
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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.
Subject: Business cycles, Economic growth, Financial institutions, Housing, Housing prices, Inflation, Mortgages, National accounts, Prices
Keywords: Business cycles, Housing, housing activity, housing finance, housing market, housing price, housing prices, Inflation, lending, mortgage lending, Mortgage markets, Mortgages, price, price formation, price trend, pricing error, securitization, WP
Pages:
27
Volume:
2005
DOI:
Issue:
200
Series:
Working Paper No. 2005/200
Stock No:
WPIEA2005200
ISBN:
9781451862195
ISSN:
1018-5941
