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 language | English (US) |
|---|---|
| Pages (from-to) | 647-692 |
| Number of pages | 46 |
| Journal | Economic Policy |
| Volume | 27 |
| Issue number | 72 |
| DOIs | |
| State | Published - Oct 1 2012 |
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ASJC Scopus subject areas
- Economics and Econometrics
- Management, Monitoring, Policy and Law
Cite this
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 journal › Article
}
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 -