Abstract
The Subprime Bubble preceding the Subprime Crisis of 2008 was fueled by risky lending practices, manifesting in the form of a large abrupt increase in the proportion of subprime mortgages issued in the US. This event also coincided with critical slowing down signals associated with instability, which served as evidence of a regime shift or phase transition in the US housing market. Here, we show that the US housing market underwent a regime shift between alternate stable states consistent with the observed critical slowing down signals. We modeled this regime shift on a universal transition path and validated the model by estimating when the bubble burst. Additionally, this model reveals loose monetary policy to be a plausible cause of the phase transition, implying that the bubble might have been deflatable by a timely tightening of monetary policy.
Highlights
Data Availability Statement: Data are from the Zillow.com research website http://www.zillow.com/ research/data/ and directly available from the authors through the e-mail address of the corresponding author
When these borrowers could not repay their loans, the subprime mortgages soured and lenders failed, leading to a financial crisis in the US housing market known as the Subprime Crisis and culminating in the Global Financial Crisis [1,2,3]
Evidence supporting our assessment that the Subprime Loans Transition and the Global Financial Crisis Transition are discontinuous phase transitions comes in the form of statistical early warning signals prior to the transitions [7]
Summary
OPEN ACCESS Citation: Tan J, Cheong SA (2016) The Regime Shift Associated with the 2004–2008 US Housing Market Bubble. The Subprime Bubble preceding the Subprime Crisis of 2008 was fueled by risky lending practices, manifesting in the form of a large abrupt increase in the proportion of subprime mortgages issued in the US. This event coincided with critical slowing down signals associated with instability, which served as evidence of a regime shift or phase transition in the US housing market. We show that the US housing market underwent a regime shift between alternate stable states consistent with the observed critical slowing down signals We modeled this regime shift on a universal transition path and validated the model by estimating when the bubble burst. This model reveals loose monetary policy to be a plausible cause of the phase transition, implying that the bubble might have been deflatable by a timely tightening of monetary policy
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