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The Journal of Real Estate Finance and Economics

Erschienen in:

01.08.2014

Financial Crisis and Credit Crunch in the Housing Market

verfasst von: F. Albert Wang, Ting Zhang

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 2/2014

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Abstract

We investigate the recent financial crisis with an emphasis on the interlock among housing, mortgage, and credit markets. Following Geanakoplos (Econometric Society Monographs 2:170–205, 2003, 2010), we develop a model in which both prices of the mortgage and its collateral are simultaneously and endogenously determined. Our empirical tests confirm the model’s prediction that an adverse change in the risk free rate or the loan recovery rate can trigger the financial crisis as we observed. Finally, we discuss how the pro-cyclical leveraging practice by financial intermediaries can magnify their losses in mortgage-related assets and consequently cause significant contraction in the balance sheets of these firms.

Vorheriger Artikel The Effect of Listing Price Strategy on Transaction Selling Prices

Nächster Artikel The Valuation Impact on Distressed Residential Transactions: Anatomy of a Housing Price Bubble

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Reinhart and Rogoff (2009) and Rajan (2010) provide excellent reviews of the past and current housing and financial crises in broader perspectives.

He and Xiong (2010) also extend Geanakoplos (2003, 2010) with a similar emphasis on the role of collateral on asset pricing. While He and Xiong (2010) focus on the optimal maturity choice of the mortgage debt in a multi-period setting, we focus on the fact that the mortgage debt is essentially a derivative (hence redundant) asset given the underlying house and the risk free bond in a one-shot model.

The data can be downloaded at http://research.stlouisfed.org/fred2/series/UMCSENT/ and more information about the data is available at http://www.sca.isr.umich.edu/ .

The test results do not change qualitatively without such transformation.

We thank Moody’s for providing this data.

The index is downloaded from http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices.

Note that the expected house price is an ex ante measure in our model.

Adrian, T., & Shin, H. (2010). Liquidity and leverage. Journal of Financial Intermediation, 19(3), 418–437.CrossRef

Altman, E., Brady, B., Resti, A., & Sironi, A. (2005). The link between default and recovery rates: theory, empirical evidence, and implications. Journal of Business, 78(6), 2203–2227.CrossRef

Bruche, M., & Conzález-Aguado, C. (2010). Recovery rates, default probabilities, and the credit cycle. Journal of Banking and Finance, 34(4), 754–764.CrossRef

Brunnermeier, M., & Pedersen, L. (2009). Market liquidity and funding liquidity. Review of Financial Studies, 22, 2201–2238.CrossRef

Geanakoplos, J. (2003). Liquidity, default, and crashes, endogenous contracts in general equilibrium, in advances in economics and econometrics: theory and applications. Eighth World Conference, Econometric Society Monographs, 2, 170–205.

Geanakoplos, J., (2010). The leverage cycle, in D. Acemoglu, K. Rogoff, and M. Woodford, (Eds.). NBER Macroeconomic Annual 2009, 24, 1–65, University of Chicago Press.

Greenlaw, D., Hatzius, J., Kashyap, A, & Shin, H. (2008). in Leveraged Losses: lessons from the mortgage market meltdown, U.S. Monetary Policy Forum Report No. 2.

He, Z. & Xiong, W. (2010). Financing speculative booms, Working Paper, University of Chicago and Princeton University.

Rajan, R. (2010). Fault lines: how hidden fractures still threaten the world economy. Princeton: Princeton University Press.

Reinhart, G., & Rogoff, K. (2009). This time is different: eight centuries of financial folly. Princeton: Princeton University Press.

Titel: Financial Crisis and Credit Crunch in the Housing Market
verfasst von: F. Albert Wang
Ting Zhang
Publikationsdatum: 01.08.2014
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 2/2014
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-013-9421-4

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