Housing Bubble Research Articles

Resilient homeownership: how partnership-based finance would have prevented the 2008 US mortgage crisis

Purpose The purpose of this study is to demonstrate that the conventional mortgage system is not appropriate for household finance because it encourages equity extraction and excessive leverage during housing boom and leads to negative equity during a housing bust, a situation that translates into mortgage defaults and foreclosures. Home financing could alternatively be structured as a diminishing partnership preventing the homeowner from ever having negative equity. Design/methodology/approach Using Johansen’s cointegration test, the authors provide evidence of a long-run relationship between the delinquency rates, volume of refinancing and the change in house price index (HPI) during the 1994–2019 period. To unravel the short run dynamics between these variables, the authors used a Granger causality test that concludes that the volume of refinancing and the change in the HPI Granger cause default rates. Findings The authors provide evidence that under the current conventional mortgage system, excessive refinancing opportunities and equity extraction that are the main factors determining delinquency rates leading to a non-sustainable homeownership. Practical implications If mortgages were such that they do not incentivize defaults and foreclosures during a housing downturn, the recovery of the housing market always leads to capital gains. Therefore, disincentivizing refinancing and equity extraction would lead to a more sustainable homeownership. Social implications Households would be encouraged to pursue sustainable homeownership through a partnership-based model with long-term wealth accumulation for themselves and their heirs rather than short-term home ownership through the conventional mortgage system, leading to negative equity and defaults when the housing market slumps. Originality/value Policymakers ought to rethink the mortgage design by promoting partnership-based finance to protect the equity a household accumulates over a lifetime and thereby enhancing stable and sustainable homeownership.

Fiction, fraud, and formality: the legal infrastructure of property speculation in Cambodia

ABSTRACT Through the standardization of property as a commodity, real estate speculation in Phnom Penh has flourished and has included foreigners, for whom Cambodian real estate property is constitutionally off-limits. This essay outlines some features of Cambodian law to highlight the contours of the country’s deep legal pluralism, as well as to describe how law is part of the way property has been remade as a market commodity. “Legal fictions” – technical devices and shell companies – give access to Phnom Penh’s real estate market. The use of legal fictions in Cambodia’s economy is widespread and, crucially, structures property ownership and its distribution. In the process these devices work to veil ownership in plain sight and skew access to property to those who can utilize this effectively.

Toxic structures: Speculation and lead exposure in Detroit's single-family rental market.

Foreclosure sales permitted investors to purchase large volumes of low-cost residential properties after the last financial crisis, reshaping patterns of property ownership in low-income housing markets across the US. This study links post-foreclosure property acquisitions by investor landlords to subsequent lead poisoning cases among children under age six living in Detroit, Michigan. We find that the odds of exhibiting elevated blood lead levels (≥5 μg/dL) are higher for children living in investor-owned homes purchased through tax foreclosure sale. These findings highlight the potential for property speculation in post-foreclosure housing markets to exacerbate severe and racialized burdens of excess lead toxicity in low-income communities.

International Real Estate Review

The aim of this paper is to test whether Google search volume indices can be used to predict house prices and identify bubbles in the housing market. We analyze the data that pertain to the 2006?2007 U.S. housing bubble, taking advantage of the heterogeneous house price development in both bubble and non-bubble states in the U.S. Using 204 housing-related keywords, we test both single search terms and indices that comprise search term sets to see whether they can be used as housing bubble indicators. We find that several keywords perform very well as bubble indicators. Among all of the keywords and indices tested, the Google search volume for ¡§Housing Bubble¡¨ and ¡§Real Estate Agent¡¨, and a constructed index that contains the twelve best-performing search terms score the highest at both detecting bubbles and not erroneously detecting non-bubble states as bubbles. A new housing bubble indicator may help households, investors, and policy makers receive advanced warning about future housing bubbles. Moreover, we show that the Google search outperforms the well-established consumer confidence index in the U.S. as a leading indicator of the housing market.

U.S. Sub-Prime Crisis: Origin and Causes

The purpose of this paper is to explain the boom and bust of the housing market in the U.S. and how the sub-prime mortgages gave birth to new securitized products in the global economy. The majority of the researches conducted previously to explore the reason for the sub-prime crisis and its impact on the volatility on the stock market of the home country (U.S.) and the other developing countries. This paper also contributes to the literature about causes, timeline, and major crisis events during the crisis period. The literature on the Subprime crisis revealed many causes of the Sub-prime crisis. These were Imprudent Mortgage Lending, Housing Bubble, Global Imbalances, Securitization, Lack of Transparency and Accountability in Mortgage Finance, Rating Agencies- The credit rating agencies gave AAA ratings to numerous issues of subprime mortgage-backed securities, many of which were subsequently downgraded to junk status. Deregulatory Legislation, Government-Mandated Sub-prime Lending, Complexity of certain financial instruments, Failure of Risk Management Systems, Excessive Leverage and Relaxed Regulation of Leverage were the most discussed reasons of Subprime Crisis.

Monitorowanie ryzyka na rynku nieruchomości mieszkalnych w Polsce

This paper applies a framework for monitoring vulnerabilities in the residential real estate sector to the case of Poland. The framework considers indicators across three dimensions of real estate-related vulnerabilities, i.e. valuation, household indebtedness and the bank credit cycle, and builds a composite model-free measure shown to have a significant forecasting performance for real estate crises. The paper shows how the monitoring can be implemented for the Polish market, discusses the developments from a historical perspective, and highlights remaining data gaps.

Impact of Advancement in Technology, False Conclusion of Real Estate Bubble, Record Low Mortgage Delinquency, Irresponsible Media, U.S. Economic Policy Disaster: Evidence Supporting Eddison Walters Risk Expectation Theory of The Global Financial Crisis of 2007 and 2008

Data analysis in recent studies by the current researcher presented evidence suggesting the existence of a real estate bubble preceding the Global Financial Crisis of 2007 and 2008 was a false conclusion. Data analysis from Walters (2019) resulted in 194.041 Mean Dependent Variable, 0.989 Adjusted R-square, 5.908 Square Error of Regression, and 488.726 Sum-of-Square Residual, from nonlinear regression analysis with the independent variable of “advancement in technology”, which proved to be the most significant factor causing the dependent variable of “home purchase price” to increase preceding the Global Financial Crisis of 2007 and 2008. Based on the findings of data analysis in Walters (2019), the researcher concluded the data confirmed the assertion agreed upon by Alan Greenspan and Ben Bernanke, it was impossible to have a real estate bubble, while citing the Efficient Market Hypothesis in 2005. Subsequent to 2005, alternative attempts to explain the existence of a real estate bubble were made by both former Chairmen of the Federal Reserve Board. Subprime lending and low interest rates were ruled out as the cause of the Global Financial Crisis of 2007 and 2008 in Walters (2019). As a result of the findings from Walters (2019), further investigation to gain an understanding of the impact of how the rapid adaption of advancement in technology influence on the rapid increase in home purchase price preceding the Global Financial Crisis of 2007 and 2008 is required. The purpose of this study is to gain an understanding of the role the rapid adaption of advancement in technology played in the mortgage industry and real estate industry in the United States, and the influence on to the rapid increase in home purchase prices preceding the Global Financial Crisis of 2007 and 2008 as a result of the changes. Insight into the rapid transformation of the mortgage industry and the real estate industry in the United States, and the role the transformation played in the crisis is a critical factor to understanding the impact of advancement in technology on the real estate market in the United States preceding the Global Financial Crisis of 2007 and 2008. Failure to consider the impact of rapid adaption of advancement in technology on the mortgage industry and real estate industry, and the transformation of the real estate market preceding the Global Financial Crisis 2007 and 2008, was a significant error which led to the false conclusion of the existence of a real estate bubble. An understanding of how the rapid transformation of the real estate market as a result of advancement in technology in the United States preceding the Global Financial Crisis of 2007 and 2008, will provide the critical knowledge to evaluate mistakes leading to the false conclusion of a real estate bubble preceding the crisis. The information gained from the current study will help avoid a future financial crisis of the same magnitude.

Eddison Walters Modern Economic Analysis Theory: Building on the Eddison Walters Risk Expectation Theory of The Global Financial Crisis of 2007 and 2008

The results of several recent studies called the analysis of economic data from the United States real estate industry preceding the Global Financial Crisis of 2007 and 2008 into question. Advancement of technology is a disruptive force throughout the economy today. The speed at which technology continues to evolve has resulted in significant changes throughout the entire economy around the world. As technology continue to evolve, there is no question technology disruption will continue to occur. Economist can no longer rely solely on backward looking historical data when conducting economic analysis. The evolution of the global economy require an understanding of the impact of advancement in technology occurring throughout the economy as researcher conduct analysis of data to draw conclusions. The result of recent studies led to the development of “Eddison Walters Modern Economic Analysis Theory”. Data analysis suggesting the false conclusion of the existence of a real estate bubble in the United States real estate market preceding the Global Financial Crisis of 2007 and 2008 was presented in Walters and Djokic (2019). Nonlinear regression analysis for correlation of variables in Walters (2019) resulted in 194.041 Mean Dependent Variable, 0.989 Adjusted R-square, 5.908 Square Error of Regression, and 488.726 Sum-of-Square Residual for the independent variable of “advancement in technology”, and the dependent variable of “home purchase price” preceding the Global Financial Crisis of 2007 and 2008. Walters (2019) concluded advancement in technology was the most significant factor causing home prices to increase preceding the Global Financial Crisis of 2007 and 2008. Overwhelming evidence led the researcher to conclude, the failure to consider the impact of advancement in technology in data analysis was the most significant error responsible for causing data analysis distortion leading to the false conclusion of the existence of a real estate bubble preceding the Global Financial Crisis of 2007 and 2008 (Walters, 2020). The researcher proposed “Eddison Walters Modern Economic Analysis Theory” in the current study. The goal of the new theory is to prevent potential error in data analysis resulting in data distortion due to the failure to consider the impact of advancement in technology on the data when conducting economic research in the future.

Investigating the Housing Market Bubbles and the Predictive Nature of Returns in Turkey

This paper investigates the housing market bubbles and the predictive nature of returns in Turkey by employing the Fully Modified OLS and the Dynamic OLS on time series data from January 2010-January 2019.The study provides new evidence on the long run boom in Turkish house prices. The drivers behind changes in house prises are discussed, ranging from accommodation services, construction and business tendency to changes in rent for housing. The results reveal a positive relationship between accommodation services and house prices at a significance level of 1%. Accordingly, a positive association exists amid construction and business tendency with house sales price. On a final note, average housing rents show a negative and insignificant response to changes in house sale prices in Turkey.

Testing for explosive bubbles in the presence of autocorrelated innovations

We analyze an empirically important issue with recursive right-tailed unit root tests for bubbles in asset prices. First, we show that serially correlated innovations, which is a feature that is present in most financial series used to test for bubbles, can lead to severe size distortions when using either fixed or automatic (based on information criteria) lag-length selection in the auxiliary regressions underlying the test. Second, we propose a sieve-bootstrap version of these tests and show that this results in tests which control size well across a number of simulation designs both with and without highly autocorrelated innovations. We also find that these improvements in size come at a relatively low cost for the power of the tests. Finally, we apply the bootstrap tests on the housing market of OECD countries, and generally find much weaker evidence of housing bubbles compared to existing evidence.

Does Tourism Contribute to Real Estate Boom? A DSGE Modeling in Small Open Economy

This article aims to investigate the relationship between inbound tourism and housing market along with the recent boom in Icelandic real estate sector, in which both house and rental prices have been rising dramatically. To this end, we construct a small open economy dynamic stochastic general equilibrium model enclosing a tourism sector and a housing market with owner-occupied and rental sections. The simulation results unveil a transmission channel that indicates the higher inbound tourism demand raises both house prices and rental prices. Variance decomposition and historical decomposition show that both inbound tourism demand shock and manufacturing technology shock are the key driving forces of the fluctuations of Icelandic house prices, consumption, and investment, whereas housing preference shock plays the most important role in determining the volatility of rental prices. The policy implications indicate that any shocks to tourism could easily spillover to housing market dynamics and aggregate fluctuations.

Australian Housing Market Booms: Fundamentals or Speculation?*

This paper investigates the presence of housing bubbles in Australia at the national, capital city and local government area (LGA) levels. We control for housing market demand and supply fundamentals using the technique of Shi (2017), and employ the recursive evolving method proposed by Phillips et al. (2015a,b) for the detection of explosive bubbles. While the national‐level analysis suggests a short‐lived bubble episode (2017Q3) over the entire sample period from 1999 to 2017, the results from the capital‐city‐level data reveal substantial heterogeneity across cities, with only short‐lived and isolated bubbles identified for Sydney and Melbourne during the recent rapid housing price expansions from 2013 to 2017. The LGA‐level analysis suggests that only a small percentage of LGA housing markets are identified to be speculative in Sydney and Melbourne from 2013 to 2017.

Neoliberal financial governance and its transformation under real estate boom and bust: The case of Ordos City, China

Based on the conceptual framework of neoliberal and post-neoliberal governance, this study explores the changing financial governance under the real estate boom-bust cycle in Ordos City, China. It finds that Ordos City’s neoliberal financial governance, featuring excessive deregulation, active public–private partnerships, market-friendly and growth-chasing institutional restructuring, land financialization, and enthusiastic state investment, has significantly contributed to the city’s real estate boom and overbuilding. In Ordos City’s post-bubble period, although preferential financial policies and deregulation persist, neoliberal financial governance has been largely curbed through reinforced governance and enhanced welfare and redistributive policy efforts such as the Housing Exchange Program. This article reiterates the essence of China’s neoliberal governance and verifies the existence of neoliberal governance in Ordos City. It also showcases the resilience of neoliberal local governing strategies in China. Nevertheless, the post-neoliberal endeavors in Ordos City, characterized by reinforced welfare and redistributive measures, and timely and effective state intervention via rigorous governance and enhanced public ownership of real estate assets for redistribution, add critical insights to the global intellectual and practical quests for post-neoliberal possibilities. Finally, this study calls for combined efforts of sustainable development policy initiatives, effective policy implementation, rigorous governance, and a mindset of sustainability for all to combat neoliberalism.

Foreclosures and Their Costs: Could They Have Been Avoided? The Case of California during the Mortgage Crisis

The author analyzes a loan-level dataset of 1,528 defaults in California that led to sale of the property as “Real Estate Owned” during the period 2005 to 2017. In 898 cases (59%), lenders lost 43% of the initial loan ($89,877) on average per foreclosure. In 942 cases (62%), borrowers lost 30% of the initial price of their home ($147,077) on average. The borrowers who ended up with a profit were those who increased their debt the most after the first purchase loan. Moreover, one in four borrowers generated an average profit of $115,856, while their lenders incurred an average loss of $93,114 precisely because excessive equity extraction transfered the downside risk to the lender. Two-thirds of all ARM borrowers defaulted within the first 3 years of the loan, implying underqualified borrowers at origination. This is an indication of predatory lending/borrowing practices that fueled the wave of foreclosures. The author finds that foreclosure discounts on REO sales in California were on average 35%, with the highest discount appearing in 2009. Measures that prevent or limit cash-outs during a housing boom, and incentives to default during a housing bust, could help reduce foreclosures and their costs. TOPICS:MBS and residential mortgage loans, legal and regulatory issues for structured finance, financial crises and financial market history Key Findings • An analysis of 1,528 foreclosures in California shows that lenders lost $89,877 and borrowers lost $147,027 on average per foreclosure during the 2008 mortgage crisis. One in four defaulting borrowers generated a profit while their lenders incurred a loss due to excessive equity extraction. • ARM borrowers defaulted within the first 3 years of the loan, indicating that these borrowers were underqualified at origination. FRM borrowers defaulted later but used cash-outs more aggressively, leading to negative equity that motivated defaults during the crisis. • Foreclosure discounts were on average 35% in California, with the worst discount occurring in 2009. Despite the volatility of HPI, every period of 12 years or longer since 1975, led to price appreciation, indicating that foreclosure should be avoided, as the recovery of the market always leads to capital gains.

Neoliberal planning, master plan adjustment and overbuilding in China: The case of Ordos City

This article applies the concept of “neoliberal planning” in China to explore the interactions between planning, especially master plan adjustments, and overbuilding in Ordos City. The results show that Ordos City's master plans have been deregulated and adjusted to facilitate and cater to, rather than to contain and regulate, the frenetic real estate development since the early 2000s, which eventually led to overbuilding and a collapsed real estate market. The findings display a dynamic and mutually reinforcing mechanism between neoliberal planning practices and the real estate boom in Ordos. Moreover, overbuilding has in turn nurtured a more rational and socio-environmentally inclusive mode of planning in Ordos City, as evidenced in the 2015 revision of the Ordos City Master Plan. This article also reveals the legal and institutional instabilities of China's master plans and suggests a transformation toward a more socio-environmentally inclusive approach to planning, with conscientious governance to ensure sustainability. This article adds insights to the underexplored, evolving interactions between neoliberal planning practices and development reality in the existing neoliberal planning literature, and it also contributes to neoliberal planning studies under authoritarian regimes. It argues that strong state capacity can function as a double-edged sword for promoting/tackling neoliberal planning. Finally, we call for more theoretical and empirical inquiries on neoliberal planning in China.

More than Metaphor: Settler Colonialism, Frontier Logic, and the Continuities of Racialized Dispossession in a Southwest U.S. City

Human geographers have long noted the colonial tropes and frontier imaginaries used to stimulate investment and normalize predatory property speculation within North American cities. Drawing on the insights of indigenous scholars and theorists of settler colonialism, in this article we argue a need to move beyond an analogical deployment of the “frontier” as a mere trope or imaginary and suggest that in settler colonial contexts, like the United States, the frontier and its structuring logic remain an ongoing feature of racial governance and capital accumulation over time. To develop this argument, we examine a genealogy of multiple and heterogeneous cycles of colonization, dispossession, and resistance in Tucson, Arizona. Attending to the racial and racist violence that shapes this history, we consider how the devaluation of nonwhite territorial and economic relations consistently structures urban real estate markets, driving the ongoing displacement and dispossession of communities of color. Viewing the frontier as a structuring logic of racial capitalism (rather than a symbolic motif or metaphorical condition) helps to explain why these racial patterns of dispossession can be observed as a hallmark outcome of processes of gentrification in settler countries like the United States. Meanwhile, through our case study we show how grassroots actors already are using the language of settler colonialism as a framework for naming and analyzing those outcomes just described, indicating a need for greater theoretical work that engages with these grassroots framings and narratives.

Real estate crisis resolution regimes and residential REITs: emerging socio-spatial impacts in Barcelona

This paper explores the development of residential Spanish Real Estate Investment Trusts (REITs, known as SOCIMIs) in the country’s growing rental market, unpacking their connection with the resolution of the 2008 financial crisis. Focus is placed on the emerging socio-spatial dynamics of one of the country’s first large-scale residential SOCIMIs in Barcelona from the global private equity firm Blackstone. I argue that SOCIMIs manifest a housing regime enabled by the Spanish state and EU backed post-crisis management of toxic real estate assets, a model built from the dispossession underlying hundreds of thousands of foreclosures and evictions and the public financial system bail out. Mapping 110 Blackstone SOCIMI properties in Barcelona in relation to neighbourhood rental prices and findings from a social media group created by Blackstone SOCIMI tenants suggests that these new residential REITs reinforce socio-spatial urban inequality and dispossession. The discussion and conclusions unpack the implications of these findings vis-à-vis urban housing access, affordability and inequalities.

Did Real Estate Professionals Anticipate the 2007-2008 Financial Crisis? Evidence from Insider Trading in the REITs

This research examines whether real estate professionals detected the property bubble and foresaw the consequent financial crisis of 2007-2008. By analysing the insider trading activities within REITs from 1996 to 2010, we find that REIT insiders reduced their holdings significantly during the real estate boom period as early as 2004, before the financial crisis. Difference-in-difference analysis reveals that REIT insiders cashed out their positions more aggressively than insiders in real estate and construction firms. The findings support the informed trader hypothesis that managers and employees in REITs anticipated the burst of the real estate bubble and the imminent financial crisis, and shifted their wealth away from the real estate market to avoid potential losses. We find no evidence to support the biased belief hypothesis (Cheng et al., 2014) that REIT insiders were over-optimistic during the real estate boom period or that their inside trading behaviour was affected by local market performance.

Are Housing Wealth Effects Asymmetric in Booms and Busts?

This paper investigates the effects of household indebtedness and housing wealth on consumption. To identify exogenous movements of housing wealth and leverage, we estimate housing supply elasticities for New Zealand urban centers. We construct synthetic panel series by using household survey data to estimate the marginal propensity to consume out of exogenous changes in housing wealth, while controlling for the household leverage ratio. Our empirical results show that, on average, the marginal propensity to consume out of housing wealth is about 3 cents out of one dollar. But it is larger, about 4 cents, in response to falling house wealth than to increasing housing wealth, about 2 cents. We further investigate the role of household indebtedness in accounting for the asymmetric effect. Our findings suggest that household leverage reinforces the housing wealth effect in a housing bust, but dampens the housing wealth effect in a boom.

Diagnosing Housing Fever with an Econometric Thermometer

Housing fever is a popular term to describe an overheated housing market or housing price bubble. Like other financial asset bubbles, housing fever can inflict harm on the real economy, as indeed the US housing bubble did in the period following 2006 leading up to the general financial crisis and great recession. One contribution that econometricians can make to minimize the harm created by a housing bubble is to provide a quantitative ‘thermometer’ for diagnosing ongoing housing fever. Early diagnosis can enable prompt and effective policy action that reduces long term damage to the real economy. This paper provides a selective review of the relevant literature on econometric methods for identifying housing bubbles together with some new methods of research and an empirical application. We first present a technical definition of a housing bubble that facilitates empirical work and discuss significant difficulties encountered in practical work and the solutions that have been proposed in the past literature. A major challenge in all econometric identification procedures is to assess prices in relation to fundamentals, which requires measurement of fundamentals. One solution to address this challenge is to estimate the fundamental component from an underlying structural relationship involving measurable variables. A second aim of the paper is to improve the estimation accuracy of fundamentals by means of an easy-to-implement reduced-form approach. Since many of the relevant variables that determine fundamentals are nonstationary and interdependent we use the IVX (Phillips et al. (2009); Kostakis et al. (2015)) method to estimate the reduced-form model to reduce the finite sample bias which arises from highly persistent regressors and endogeneity. The recursive evolving test of Phillips, Shi, and Yu (2015a, PSY) is applied to the estimated non-fundamental component for the identification of speculative bubbles. The new bubble test developed here is referred to as PSY-IVX. An empirical application to the eight Australian capital city housing markets over the period 1999 to 2017 shows that bubble testing results are sensitive to different ways of controlling for fundamentals and highlights the importance of accurate estimation of these housing market fundamentals.