The Housing Boom and Bust: Model Meets Evidence

TLDR

The study builds a macroeconomic model of the US economy with multiple aggregate shocks that generate equilibrium house price fluctuations and uses counterfactual experiments to analyze the Great Recession boom‑bust. The model incorporates multiple aggregate shocks that drive house price fluctuations, and counterfactual experiments are employed to assess the impact of the boom‑bust. The analysis shows that belief shifts, not credit changes, drive house price and rent movements, that the boom‑bust accounts for about half of nondurable expenditure swings through a wealth effect, and that a large debt‑forgiveness program would barely curb price collapse but would cut foreclosures and modestly boost consumption during recovery.

Abstract

We build a model of the US economy with multiple aggregate shocks that generate fluctuations in equilibrium house prices. Through counterfactual experiments, we study the housing boom-bust around the Great Recession, with three main results. First, the main driver of movements in house prices and rents was a shift in beliefs, not a change in credit conditions. Second, the boom-bust in house prices explains half of the corresponding swings in nondurable expenditures through a wealth effect. Third, a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.