Working Paper: CEPR ID: DP10358
Authors: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
Abstract: The housing boom that preceded the Great Recession was due to an increase in credit supply driven by looser lending constraints in the mortgage market. This view on the fundamental drivers of the boom is consistent with four empirical observations: the unprecedented rise in home prices and household debt, the stability of debt relative to house values, and the fall in mortgage rates. These facts are difficult to reconcile with the popular view that attributes the housing boom to looser borrowing constraints associated with lower collateral requirements. In fact, a slackening of collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust.
Keywords: Collateral Constraints; House Prices; Housing and Credit Boom; Leverage Restrictions
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| looser lending constraints (G21) | increase in credit supply (E51) |
| increase in credit supply (E51) | housing boom (R31) |
| looser lending constraints (G21) | lower mortgage rates (G21) |
| looser lending constraints (G21) | higher home prices (R21) |
| slackening of collateral constraints (G33) | decrease in home prices (R31) |
| relaxation of lending constraints (G21) | increased household debt (G51) |
| relaxation of lending constraints (G21) | stable debt-to-collateral ratio (G32) |
| relaxation of lending constraints (G21) | higher house prices (R21) |
| relaxation of lending constraints (G21) | consumption and employment (E20) |