‘It’s the Economy, Stupid’: Politico-Economic Theories and Cinematic Language in The Big Short

The US Housing Bubble and the Informational Efficiency

US housing bubble varies in the 50 states in terms of housing price. Between 2000-2007, housing price skyrocketed in 7 states, with annual growth rate between 11-13%, whereas the interior states grew at 2-5% annually. Between 2007-2011, housing price plummeted in 4 states with annual falling rate of 9-11%, whereas the interior states fell only 1-4% annually. Moreover, housing prices in North Dakota rose by 11% in the plummeting years of 2007-2011. Literature on housing bubbles generally ignored the regional disparity which we are interested in and therefore set forth our research question as: what has driven the uneven distribution of the US housing bubble in terms of housing price between 2000-2011? We firstly assume that the regional disparity was caused by the variances of the following three variables:(1)irrational expectation on housing prices;(2)mortgage underwriting standards;(3)political preferences. In order to compare and contrast the above three variables, we need to quantify them in the first place. We merged the notion of capital gains with the theory of expected price elasticity derived from Hick(1946) and Lange(1949) into a single framework and thus quantified (1)irrational expectation on housing prices; we then divided the employees who issue loans by the employees who check and authorize the loans, and got our quantified(2)mortgage underwriting standards; thirdly, we coded the 50 states political preferences as 1,0, or－1, according to their voting records between the 1992-2008 presidential elections. Our panel data regression informs us that the uneven fluctuation of housing prices in the 50 states between 2000-2011 is due to differences in irrational expectation on housing prices among states, as well as differences in recognition of the movements of housing prices in the past three years . Mortgage underwriting standards does explain the movement of housing prices in 2000-2011, however the effect is not so large. Political preferences do not impact housing prices at all; Democratic states do not have more severe bubbles than the Republican states.

We study the existence and international migration of housing market bubbles, using quarterly information of twenty OECD countries for the period comprised between 1970 and 2015. We find that housing bubbles are present in all the countries included in our sample. Multiple bubbles are found in all but two of the countries included in our sample. We found ten episodes of migration. All of them had origin in the US housing bubble preceding the subprime crisis. Most migrations were to European countries. Notably, the Spanish housing bubble was not a direct consequence of the US housing bubbles. Its origin must be found in other causes. Classification JEL: G01; G12; C22

We study the existence and international transmission of housing market bubbles, using quarterly information of twenty OECD countries for the period comprised between 1970 and 2015. We find that housing bubbles are present in all the countries included in our sample. Multiple bubbles are found in all but two of those countries. We find five episodes of transmission. All of them had origin in the US housing bubble preceding the subprime crisis. Most transmissions were to European countries. Notably, the Spanish housing bubble was not a direct consequence of the US housing bubble. Its origin must be found in other causes.

Bill�s take on �The US Housing Bubble, Credit Crisis, Crash and Recovery 2006 to 2015�

Risk-based pricing is an alignment of loan risk pricing with expected loan risk – charging a higher interest rate for higher risk (Yezer, 2002). This article shows systematic relaxation of risk pricing for sub-prime loans during the US housing bubble, a period that extended from 2001 to 2006. For example, an identical loan, but having different vintages is shown to have significantly lower premiums in 2005 than in 2003. Strikingly, for a given credit risk, estimation results show a premium reduction of 60 basis points in sub-prime originations from 2003 to 2005.

This chapter assesses the collapse of Lehman Brothers in September of 2008, which was a watershed event that pushed the global financial system and economy to the brink. The worst-case scenario was avoided, however, when governments and central banks around the world began to liquefy markets and stabilize financial asset prices as the magnitude of the crisis became evident. The turmoil of the months following the collapse of Lehman was one of the most unforgettable episodes during the author's tenure as governor of the Bank of Japan. The chapter begins by looking at the collapse of the US housing bubble. The bursting of the US housing bubble quickly became evident in sluggish housing investments, but it took some time before the overall economy began to suffer. The chapter then considers how the Bank of Japan did everything within its powers to maintain the stability of the financial system and the economy.

The Market Structure of Securitisation and the US Housing Bubble

Housing finance and, specifically, the subprime private label securitisation market in the US, was at the epicentre of the global financial crisis. Excessive debt expansion in the run-up to the crisis resulted in credit risk, under-identified and mispriced ex ante, and in systemic risk. This paper considers the role of financial innovation in debt markets and the changing market structure of securitisation in the evolution of the US housing price bubble. New financing vehicles contributed to growing risk, but the more salient factor was the change in the structure of securitisation, which led to unsustainable levels of debt.

Econometric Regime Shifts and the US Subprime Bubble

The United States suffers from a shortage of well-placed homes. This was true even at the peak of the housing boom in 2005. Using a broad array of evidence on housing inflation, income, migration, homeownership trends, and international comparisons, Shut Out demonstrates that high home prices have been largely caused by the constrained housing supply in a handful of magnet cities leading the new economy. The same phenomenon is occurring in leading countries across the globe. Gentrifying cities have become exclusionary bastions in the new postindustrial economy. The US housing bubble that peaked in 2005 is more accurately described as a refugee crisis than a credit bubble. Surging demand for limited urban housing triggered a spike of migration away from the magnet cities among households with moderate and lower incomes who could no longer afford to remain, causing a brief contagion of high prices in the cities where the migrants moved. In this book, author Kevin Erdmann observes that the housing bubble has been broadly and incorrectly attributed to various “excesses.” Policymakers and economists concluded that our key challenge was that we had built too many homes. This misdiagnosis of the problem, according to Erdmann, led to misguided public polices, which were the primary cause of the subsequent financial crisis. A sort of moral panic about supposed excesses in home lending and construction led to destabilizing monetary and regulatory decisions. As the economy slumped, a sense of fatalism prevented the government from responding appropriately to the worsening situation. Shut Out provides a much-needed correction to the causes and consequences of financial crises and secular stagnation.

A speculative bubble arises when the market price of a financial asset diverges from its fundamental value, resulting in abrupt and disproportionate hikes that cannot be rationally explained by its underlying intrinsic value. This behavior is often followed by market crashes, as observed during historical asset bubbles such as the Dutch Tulip Mania (1634-1637), the Mississippi bubble (1719-1720), the South Sea bubble (1720), the stock-market bubble of the US (1921-1929), the Japanese stock market and real estate bubbles (1986-1991), and the recent US housing bubble and the stock market crash (2002-2006). In the housing market, speculative bubbles can be attributed to excessive public expectations of future price increases, leading to overpricing and eventually diminishing demand and instability of inflated home prices (Case and Shiller, 2003). The cycle of a housing market bubble involves individuals continuing to purchase houses despite awareness of overpricing, with the expectation of compensation through further price increases. This perception of continuous price increases leads to increased demand, which further drives up prices. However, house prices cannot increase indefinitely, and the steady increase eventually becomes unstable, resulting in a downward adjustment that may occur at a much faster pace than price increases. The existence of speculative bubbles in stock and housing markets has led academics to investigate their potential role in financial crises.

According to common wisdom, the great depression of 2008/2009 is rooted in a financial crisis that spread from the US to most other parts of the world. This interpretation is challenged. Using theoretical concepts of David Harvey and Giovanni Arrighi, the current crisis is analyzed as a switching crisis from one global spatial fix of capital accumulation to another. First, the economic power shifts from the West to semi-peripheral states in East Asia as well as other world regions are identified as one major reason for the development of structural imbalances in world economy. It is analyzed how the structural imbalances – especially between China and the US – tended to deepen the US housing bubble. After the bubble had bursted, the crisis hit different world regions in a different manner. China and other emerging nations in East Asia as well as in South America were able to withstand the crisis due to large stimulus packages, whereas the EU, US and Japan have been deeply affected. The transition in global political economy will be even speeded up by the crisis. Finally, different scenarios of a new map of global power are discussed.

Diagnosing Housing Fever with an Econometric Thermometer

Diagnosing Housing Fever with an Econometric Thermometer