Working Paper

Credit Supply and the Housing Boom


Abstract: The housing boom that preceded the Great Recession was due to an increase in credit supply driven by looser lending constraints in the mortgage market. This view on the fundamental drivers of the boom is consistent with four empirical observations: the unprecedented rise in home prices and household debt, the stability of debt relative to house values, and the fall in mortgage rates. These facts are difficult to reconcile with the popular view that attributes the housing boom to looser borrowing constraints associated with lower collateral requirements. In fact, a slackening of collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust.

Keywords: mortgages; Credit; housing prices;

JEL Classification: G21; E44; R21;

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Authors

    Justiniano, Alejandro

    Primiceri, Giorgio E.

    Tambalotti, Andrea

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2014-07-01

Number: WP-2014-21

Pages: 49 pages