Abstract
The paper employs monthly data to test alternative hypotheses for the causes of the large increase and subsequent decline in U.S. housing prices during the 2000-2010 decade. The empirical evidence using VAR modeling is consistent with the hypothesis that Federal Reserve interest rate policy was a cause of the movements in housing prices. In addition, federal fiscal policy and interest rates on adjustable-rate mortgages are found to be associated with housing prices. On the other hand, the interest rate on standard 30-year mortgages and a measure of net capital flows from abroad were not related to housing prices. Foreclosure rates were also important. The study finds that foreclosures and housing prices interacted: more foreclosures produced lower housing prices and lower housing prices generated more foreclosures.
Highlights
The owner-occupied residence is an important element in portfolio of the average household
McDonald-Stokes [5], which was published on-line June 18, 2011, presented evidence that the Federal Reserve federal funds rate policy had an impact on the housing bubble as measured by the S&P/Case-Shiller housing price index
Positive shocks to the log unemployment rate and the log foreclosure rate did have negative effects on the log housing price as would be suggested by theory
Summary
The owner-occupied residence is an important element in portfolio of the average household. The traditional financial justifications for home ownership are that the household can take advantage of the income tax provisions that permit deductions for interest and property taxes, paying down the home loan is a form of forced saving that builds wealth, and ownership is a good hedge against inflation. Kain and Quigley [1] pointed out that restrictions on home ownership faced by minority households put them at a severe financial disadvantage. The sharp up and down movements in housing prices in the past 15 years have called the financial advantage of home ownership into question. A study by Pfeffer as reported by Bernasek [2] found that the real wealth of the median household (2013 dollars) fell from $87,992 in 2003 to $56,355 in 2013, largely because of the decline in housing prices.
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