DP8361 Shifting Credit Standards and the Boom and Bust in US House Prices

Author(s): John V Duca, John Muellbauer, Anthony Murphy
Publication Date: April 2011
Keyword(s): credit standards, house prices, subprime mortgages
JEL(s): C51, C52, E51, G21, R31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8361

The U.S. house price boom has been linked to an unsustainable easing of mortgage credit standards. However, standard time series models of US house prices omit credit constraints and perform poorly in the 2000?s. We incorporate data on credit constraints for first time buyers into a model of US house prices based on the (inverted) demand for housing services. The model yields not only a stable long-run cointegrating relationship, a reasonable speed of adjustment, plausible income and price elasticities and an improved fit, but also sensible estimates of tax credit effects and the possible bottom in real house prices.