Working Paper: NBER ID: w24823
Abstract: Speculation is a critical channel through which credit supply expansion affects the housing cycle. The surge in private label mortgage securitization in 2003 fueled a large expansion in mortgage credit supply by lenders financed with non-core deposits. Areas more exposed to these lenders experienced a large relative rise in transaction volume driven by a small group of speculators, and these areas simultaneously witnessed an amplified housing boom and bust. Consistent with the importance of belief heterogeneity, house price growth expectations of marginal buyers rose during the boom, while housing market pessimism among the general population increased.
Keywords: credit supply; housing speculation; private label mortgage securitization; financial cycles
JEL Codes: E03; E44; G01; G12; G2; G4; R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in mortgage originations in areas exposed to high noncore liability (NCL) lenders (G21) | Rising transaction volumes (F69) |
| Rising transaction volumes (F69) | Speculative buying behavior (D84) |
| Expansion of mortgage credit supply (E51) | Speculative trading frenzy (G13) |
| Speculative trading frenzy (G13) | Fluctuations in house prices and construction activity (E32) |
| Surge in private label mortgage securitization (PLS) in 2003 (G21) | Increase in housing market activity (R31) |
| Expansion of mortgage credit supply (E51) | Sharp decline in mortgage origination and housing market activity beginning in 2007 (G21) |
| Surge in private label mortgage securitization (PLS) in 2003 (G21) | Increase in mortgage originations in areas exposed to high noncore liability (NCL) lenders (G21) |