The Housing Boom and Bust: Model Meets Evidence
We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.
We thank numerous seminar participants and discussants for useful comments. In particular, we are grateful to David Berger, James Cloyne, Joao Cocco, Nobu Kiyotaki, Ralph Luetticke, Jochen Mankart, Pontus Rendahl, Pietro Riechlin, Chris Sims, Amir Sufi, Harald Uhlig, and Stijn Van Nieuwerburgh. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
• My primary employer is University of Chicago
• During the last three years, the following institutions have paid me or given me research grants valued cumulatively at more than $5000:
o Reserve Bank of Australia
o Brookings Institution
o National Science Foundation
o Sloan Foundation
o University of New South Wales
o United States Soccer Federation
Greg Kaplan & Kurt Mitman & Giovanni L. Violante, 2020. "The Housing Boom and Bust: Model Meets Evidence," Journal of Political Economy, vol 128(9), pages 3285-3345.