Working Paper: NBER ID: w25403
Authors: Tomasz Piskorski; Amit Seru
Abstract: We follow a representative panel of millions of consumers in the U.S. from 2007 to 2017 and document several facts on the long-term effects of the Great Recession. There were about six million foreclosures in the ten-year period after Lehman’s collapse. Owners of multiple homes accounted for 25% of these foreclosures, while comprising only 13% of the market. Foreclosures displaced homeowners, with most of them moving at least once. Only a quarter of foreclosed households regained homeownership, taking an average four years to do so. Despite massive stimulus and debt relief policies, recovery was slow and varied dramatically across regions. House prices, consumption and unemployment remain below pre-crisis levels in about half of the zip codes in the U.S. Regions that recovered to pre-crisis levels took on average four to five years from the depths of the Great Recession. Regional variation in the extent and speed of recovery is strongly related to frictions affecting the pass-through of lower interest rates and debt relief to households including mortgage contract rigidity, refinancing constraints, and the organizational capacity of intermediaries to conduct loan renegotiations. A simple counterfactual based on our estimates suggest that, regardless of the narratives of the causes of housing boom and bust, alleviating these frictions could have reduced the relative foreclosure rate by more than half and resulted in up to twice as fast recovery of house prices, consumption, and employment. Our findings have implications for mortgage market design, monetary policy pass-through, and macro-prudential and housing policy interventions.
Keywords: Great Recession; Debt Relief; Foreclosure; Recovery; Mortgage Market
JEL Codes: E44; G01; G2; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Alleviating frictions in the mortgage market (G21) | Reduced relative foreclosure rate (G21) |
| Alleviating frictions in the mortgage market (G21) | Faster recovery of house prices, consumption, and employment (E27) |
| Frictions (mortgage contract rigidity, refinancing constraints) (G21) | Slower recovery of house prices, consumption, and employment (E27) |
| Regional mobility patterns and neighborhood characteristics (R23) | Significant spatial variation in recovery (C21) |