NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Can Cheap Credit Explain the Housing Boom?

Edward L. Glaeser, Joshua D. Gottlieb, Joseph Gyourko

NBER Working Paper No. 16230
Issued in July 2010
NBER Program(s):   EFG

Between 1996 and 2006, real housing prices rose by 53 percent according to the Federal Housing Finance Agency price index. One explanation of this boom is that it was caused by easy credit in the form of low real interest rates, high loan-to-value levels and permissive mortgage approvals. We revisit the standard user cost model of housing prices and conclude that the predicted impact of interest rates on prices is much lower once the model is generalized to include mean-reverting interest rates, mobility, prepayment, elastic housing supply, and credit-constrained home buyers. The modest predicted impact of interest rates on prices is in line with empirical estimates, and it suggests that lower real rates can explain only one-fifth of the rise in prices from 1996 to 2006. We also find no convincing evidence that changes in approval rates or loan-to-value levels can explain the bulk of the changes in house prices, but definitive judgments on those mechanisms cannot be made without better corrections for the endogeneity of borrowers’ decisions to apply for mortgages.

download in pdf format
   (443 K)

email paper

This paper is available as PDF (443 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16230

Published: Can Cheap Credit Explain the Housing Boom?, Edward L. Glaeser, Joshua D. Gottlieb, Joseph Gyourko. in Housing and the Financial Crisis, Glaeser and Sinai. 2013

Users who downloaded this paper also downloaded these:
Himmelberg, Mayer, and Sinai w11643 Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions
Burnside, Eichenbaum, and Rebelo w16734 Understanding Booms and Busts in Housing Markets
Glaeser, Gottlieb, and Gyourko Can Cheap Credit Explain the Housing Boom?
Wu, Gyourko, and Deng w16189 Evaluating Conditions in Major Chinese Housing Markets
Glaeser, Gyourko, and Saiz w14193 Housing Supply and Housing Bubbles
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us