How housing slumps end

Agustín S. Bénétrix, Barry Eichengreen, Kevin O'Rourke

Research output: Contribution to journalArticle

Abstract

We construct a simple model of the end of housing slumps. We show that the probability that real housing prices stop falling is higher the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline, the faster is GDP growth, and, most importantly, the lower are mortgage interest rates. Slumps are longer where the construction sector is more responsive, allowing booms to create larger supply overhangs, but shorter the more developed are financial markets and institutions, enabling new buyers to access credit and enter the market. Falling house prices can lead to lower private sector credit flows, in turn limiting the scope for new home purchases and creating the danger of a vicious spiral of slumping housing prices and distressed financial institutions. This suggests that policymakers should take steps to break the link between the housing market problems and banking problems by intervening to recapitalize distressed banking systems while using quantitative easing and credit easing to lower mortgage interest rates and help revive the housing market directly.

Original languageEnglish (US)
Pages (from-to)647-692
Number of pages46
JournalEconomic Policy
Volume27
Issue number72
DOIs
StatePublished - Oct 1 2012

Fingerprint

housing market
interest rate
banking
financial market
slumping
Gross Domestic Product
private sector
price
House prices
market
Housing prices
Housing market
Credit
Interest rates
Mortgages
Financial institutions
credit
Purchase
Banking system
Quantitative easing

ASJC Scopus subject areas

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

Cite this

Bénétrix, A. S., Eichengreen, B., & O'Rourke, K. (2012). How housing slumps end. Economic Policy, 27(72), 647-692. https://doi.org/10.1111/j.1468-0327.2012.00292.x

How housing slumps end. / Bénétrix, Agustín S.; Eichengreen, Barry; O'Rourke, Kevin.

In: Economic Policy, Vol. 27, No. 72, 01.10.2012, p. 647-692.

Research output: Contribution to journalArticle

Bénétrix, AS, Eichengreen, B & O'Rourke, K 2012, 'How housing slumps end', Economic Policy, vol. 27, no. 72, pp. 647-692. https://doi.org/10.1111/j.1468-0327.2012.00292.x
Bénétrix AS, Eichengreen B, O'Rourke K. How housing slumps end. Economic Policy. 2012 Oct 1;27(72):647-692. https://doi.org/10.1111/j.1468-0327.2012.00292.x
Bénétrix, Agustín S. ; Eichengreen, Barry ; O'Rourke, Kevin. / How housing slumps end. In: Economic Policy. 2012 ; Vol. 27, No. 72. pp. 647-692.
@article{04086fa8fb3a4c769e8b7e654c742c3f,
title = "How housing slumps end",
abstract = "We construct a simple model of the end of housing slumps. We show that the probability that real housing prices stop falling is higher the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline, the faster is GDP growth, and, most importantly, the lower are mortgage interest rates. Slumps are longer where the construction sector is more responsive, allowing booms to create larger supply overhangs, but shorter the more developed are financial markets and institutions, enabling new buyers to access credit and enter the market. Falling house prices can lead to lower private sector credit flows, in turn limiting the scope for new home purchases and creating the danger of a vicious spiral of slumping housing prices and distressed financial institutions. This suggests that policymakers should take steps to break the link between the housing market problems and banking problems by intervening to recapitalize distressed banking systems while using quantitative easing and credit easing to lower mortgage interest rates and help revive the housing market directly.",
author = "B{\'e}n{\'e}trix, {Agust{\'i}n S.} and Barry Eichengreen and Kevin O'Rourke",
year = "2012",
month = "10",
day = "1",
doi = "10.1111/j.1468-0327.2012.00292.x",
language = "English (US)",
volume = "27",
pages = "647--692",
journal = "Economic Policy",
issn = "0266-4658",
publisher = "Wiley-Blackwell",
number = "72",

}

TY - JOUR

T1 - How housing slumps end

AU - Bénétrix, Agustín S.

AU - Eichengreen, Barry

AU - O'Rourke, Kevin

PY - 2012/10/1

Y1 - 2012/10/1

N2 - We construct a simple model of the end of housing slumps. We show that the probability that real housing prices stop falling is higher the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline, the faster is GDP growth, and, most importantly, the lower are mortgage interest rates. Slumps are longer where the construction sector is more responsive, allowing booms to create larger supply overhangs, but shorter the more developed are financial markets and institutions, enabling new buyers to access credit and enter the market. Falling house prices can lead to lower private sector credit flows, in turn limiting the scope for new home purchases and creating the danger of a vicious spiral of slumping housing prices and distressed financial institutions. This suggests that policymakers should take steps to break the link between the housing market problems and banking problems by intervening to recapitalize distressed banking systems while using quantitative easing and credit easing to lower mortgage interest rates and help revive the housing market directly.

AB - We construct a simple model of the end of housing slumps. We show that the probability that real housing prices stop falling is higher the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline, the faster is GDP growth, and, most importantly, the lower are mortgage interest rates. Slumps are longer where the construction sector is more responsive, allowing booms to create larger supply overhangs, but shorter the more developed are financial markets and institutions, enabling new buyers to access credit and enter the market. Falling house prices can lead to lower private sector credit flows, in turn limiting the scope for new home purchases and creating the danger of a vicious spiral of slumping housing prices and distressed financial institutions. This suggests that policymakers should take steps to break the link between the housing market problems and banking problems by intervening to recapitalize distressed banking systems while using quantitative easing and credit easing to lower mortgage interest rates and help revive the housing market directly.

UR - http://www.scopus.com/inward/record.url?scp=84867700306&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84867700306&partnerID=8YFLogxK

U2 - 10.1111/j.1468-0327.2012.00292.x

DO - 10.1111/j.1468-0327.2012.00292.x

M3 - Article

AN - SCOPUS:84867700306

VL - 27

SP - 647

EP - 692

JO - Economic Policy

JF - Economic Policy

SN - 0266-4658

IS - 72

ER -