Working Paper: CEPR ID: DP8361
Authors: John V. Duca; John Muellbauer; Anthony Murphy
Abstract: The U.S. house price boom has been linked to an unsustainable easing of mortgage credit standards. However, standard time series models of US house prices omit credit constraints and perform poorly in the 2000?s. We incorporate data on credit constraints for first time buyers into a model of US house prices based on the (inverted) demand for housing services. The model yields not only a stable long-run cointegrating relationship, a reasonable speed of adjustment, plausible income and price elasticities and an improved fit, but also sensible estimates of tax credit effects and the possible bottom in real house prices.
Keywords: credit standards; house prices; subprime mortgages
JEL Codes: C51; C52; E51; G21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Easing of credit standards (G21) | Increased demand for housing (R21) |
| Rising LTV ratios (G21) | Lowered barriers for marginal buyers (D16) |
| Rising LTV ratios (G21) | Surge in homeownership among younger households (R21) |
| Incorporation of LTV data into house price models (C51) | More stable long-run relationships (D15) |
| Incorporation of LTV data into house price models (C51) | Improved model fits (C52) |
| 2009 first-time buyer tax credit (G51) | Significant positive effect on house prices (R31) |
| Shifts in credit standards (G21) | Major role in boom and bust of US house prices (E32) |