Research Review | 12.20.2011 | Housing & The Business Cycle

How Long Do Housing Cycles Last? A Duration Analysis for 19 OECD Countries
Philippe Bracke (London School of Economics) | Oct. 2011
19 OECD countries. I provide two sets of results, one pertaining to the average length and the other to the length distribution. On average, upturns are longer than downturns, but the difference disappears once the last house price boom is excluded. In terms of length distribution, upturns (but not downturns) are more likely to end as their duration increases. This duration dependence is consistent with a boom-bust view of house price dynamics, where booms represent departures from fundamentals that are increasingly difficult to sustain.

End in Sight for Housing Troubles?
Daniel L. Chertok (XR Trading) | Sep. 2011
A historical relationship between home prices and family income is examined based on more than 40 years of data. A new home a ordability ratio based on the average home price, family income and mortgage rates is analyzed in the historical context. This indicator is used to gauge the current state of the residential housing market in the United States. Historical data points to an imminent but slow recovery in the housing market over the next few years.
The Role of Capital Gains Taxes in the Housing Bubble
W. Gavin Ekins (Emory University) | Oct. 2011
Capital gain taxes are integrated into an excess-bid model to develop an analytical narrative of the housing market crash. Housing data is used to support the narrative. The paper concludes that sudden changes in capital gains tax rates can cause formed bubbles to burst. Research recommends gradual changes in capital gain taxes rather than large one-time changes.
Household Balance Sheets, Consumption, and the Economic Slump
Atif R. Mian (UC Berkeley), et al. | Nov. 2011
The large accumulation of household debt prior to the recession in combination with the decline in house prices has been the primary explanation for the onset, severity, and length of the subsequent consumption collapse. Using novel county level retail sales data, we show that the decline in consumption was much stronger in high leverage counties with large house price declines. Levered households experiencing larger house price declines faced larger drops in credit limits, were unable to refinance mortgages into lower rates, and paid down existing debts at a faster pace. Using zip code level data on auto purchases and exploiting within-county variation, we show that the consumption response to declining house prices was stronger in areas with more reliance on housing as a source of wealth.
What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis
Jihad C. Dagher and Ning Fu (IMF) | Sep. 2011
We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle. Using comprehensive data on mortgage originations, which we aggregate at the county level, we first establish that the market share of these independent non-bank lenders increased in virtually all US counties during the boom. We then exploit the heterogeneity in the market share of independent lenders across counties as of 2005 and show that higher market participation by these lenders is associated with increased foreclosure filing rates at the onset of the housing downturn. We carefully control for counties’ economic, demographic, and housing market characteristics using both parametric and semi-nonparametric methods. We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states. The macroeconomic consequences of our findings are significant: we show that the market share of these lenders as of 2005 is also a strong predictor of the severity of the housing downturn and subsequent rise in unemployment. Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode.
Real Estate Bubbles and Weak Recoveries
Adrian Peralta-Alva (St. Louis Fed) | Dec. 2011
As the real estate bubble burst, the U.S. economy found itself with a stock of residential and nonresidential structures higher than desired. Under these conditions, economic theory predicts investment in structures should collapse (just as observed in the data) and stay low until the desired level is attained (either by natural depreciation or by actively restructuring the housing stock to more desirable uses). Moreover, this adjustment process is expected to be slow, given the relatively low rate of depreciation of residential and nonresidential structures.