NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Drivers of the Great Housing Boom-Bust: Credit Conditions, Beliefs, or Both?

Josue Cox, Sydney C. Ludvigson

NBER Working Paper No. 25285
Issued in November 2018, Revised in January 2019
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

Two potential driving forces of house price fluctuations are commonly cited: credit conditions and beliefs. We posit some simple empirical calculations using direct measures of credit conditions and beliefs to consider their potentially distinct roles in house price fluctuations at the aggregate level. Changes in credit conditions are positively related to the fraction of riskier non-conforming debt in total mortgage lending, while measures of beliefs are unrelated to this ratio. Credit conditions explain quantitatively large magnitudes of the variation in quarterly house price growth and also predict future house price growth. Beliefs bear some relation to contemporaneous house price growth but have little predictive power. A structural VAR analysis implies that shocks to credit conditions have quantitatively important dynamic causal effects on house price changes.

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Document Object Identifier (DOI): 10.3386/w25285

 
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