NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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How Monetary Policy Shaped the Housing Boom

Itamar Drechsler, Alexi Savov, Philipp Schnabl

NBER Working Paper No. 25649
Issued in March 2019
NBER Program(s):Asset Pricing Program, Corporate Finance Program, The Monetary Economics Program

Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, leading them to contract new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. Since privately-securitized loans are neither GSE-insured nor deposit-funded, they are run-prone, which made the mortgage market fragile. Consistent with our theory, the re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates.

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Document Object Identifier (DOI): 10.3386/w25649

 
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