Speculative Dynamics of Prices and Volume

DeFusco, Anthony; Nathanson, Charles G.; Zwick, Eric

doi:10.3386/w23449

Cited by 104 publications

(72 citation statements)

References 62 publications

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“…We explore the interaction between speculative and fundamental motives in related work (DeFusco, Nathanson, and Zwick ()).…”

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Arrested Development: Theory and Evidence of Supply‐Side Speculation in the Housing Market

Nathanson¹,

Zwick

2018

The Journal of Finance

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This paper studies the role of disagreement in amplifying housing cycles. Speculation is easier in the land market than in the housing market due to frictions that make renting less efficient than owner‐occupancy. As a result, undeveloped land facilitates construction and intensifies the speculation that causes booms and busts in house prices. This observation challenges the standard intuition that in cities where construction is easier, house price booms are smaller. It can also explain why the largest house price booms in the United States between 2000 and 2006 occurred in areas with elastic housing supply.

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“…We explore the interaction between speculative and fundamental motives in related work (DeFusco, Nathanson, and Zwick ()).…”

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confidence: 99%

“…We explore the interaction between speculative and fundamental motives in related work(DeFusco, Nathanson, and Zwick (2016)). 10 This dispersion is partly due to the limitation that potential residents can buy at most one house.…”

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Arrested Development: Theory and Evidence of Supply‐Side Speculation in the Housing Market

Nathanson¹,

Zwick

2018

The Journal of Finance

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“…4 An alternative channel proposes that the number of optimistic agents changes with the credit cycle. For example, if house price expectations are extrapolative or adaptive, initial increases in house prices can feed on themselves, see for example Barberis et al (2015), Lo (2004), Gennaioli, Shleifer andVishny, (2015), or DeFusco, Nathanson, andZwick (2016). Burnside, Eichenbaum, and Rebelo (2016) provide a different micro-foundation via social contagion, where optimistic agents with tighter priors can convince less optimistic agents to change their beliefs.…”

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Dynamics of Housing Debt in the Recent Boom and Great Recession

Adelino

Schoar

Severino

2017

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This paper documents a number of key facts about the evolution of mortgage debt, homeownership, debt burden and subsequent delinquency during the recent housing boom and Great Recession. We show that the mortgage expansion was shared across the entire income distribution, i.e. the flow and stock of debt rose across all income groups (except for the top 5%). The mortgage expansion was especially pronounced in areas with increased house prices, and the speed at which houses turned over (churn) in these areas went up significantly. However, the average loan-to-value ratios (LTV) at origination did not increase over the boom period. While homeownership rates increased for the middle and upper income households, there was no increase in homeownership for the lowest income groups. Finally, default rates post-crisis went up predominantly in areas with large house price drops, especially for high income and high-FICO borrowers. These results are consistent with a view that the run up in mortgage debt over the pre-crisis period was driven by rising home values and expectations of increasing prices. The lasting impact of the mortgage crisis of 2008 on the U.S. economy and international financial markets has spurred an intense debate among economists and policy-makers about the origins of the crisis. The collapse of collateral values post 2007 led to a large increase in defaults, which in turn disrupted banks and the shadow banking system and was a leading cause of the deep recession that followed. Even after large government stabilization programs, low house prices and depressed expectations held back investment and consumption. The rapid increase in household debt over the 2000s, especially mortgage credit, has been widely documented but Manuelviews differ on what drove this expansion in credit. This paper outlines the two major narratives that have been proposed to explain the crisis and lays out the evidence that aims to differentiate them. We call these the subprime view and the expectations view of the boom and bust. We provide new facts and confirm several prior findings on the evolution of debt, homeownership rates, debt-to-income (DTI) ratios, and loan-to-value (LTV) ratios during both the housing boom and the housing bust.1 The results support the idea that house prices and house price expectations played a central role in both the expansion of credit and the subsequent housing market bust.One view of the housing boom and bust is that financial innovation and deregulation in the precrisis period led to increased securitization and delegation in underwriting, which in turn exacerbated agency problems within the mortgage origination chain and led to distortions in Gyourko (2011)), or gentrification trends (Guerrieri, Hartley, and Hurst (2013)).It is important to understand the primary drivers of the recent boom-and-bust cycle in household leverage, since it not only affects the diagnosis but also suggests different policy changes to guard against future crises. If the first view dominates, then regulations ...

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“…The macro-level empirical evidence supporting this assertion, however, often relies on a residual, that is, researchers attribute the unexplained variation in house prices to expectations (Dokko, Doyle, Kiley, Kim, Sherlund, Sim, and Heuvel, 2011;Glaeser, Gottlieb, and Gyourko, 2012). At the micro-level, researchers can identify the relation between speculative investment activity (e.g., out-of-town investors) and prices using granular data (Bayer, Geissler, and Roberts, 2011;Chinco and Mayer, 2015;DeFusco, Nathanson, and Zwick, 2017;Gao, Sockin, and Xiong, 2017;Griffin, Kruger, and Maturana, 2018;Bailey, Cao, Kuchler, and Stroebel, 2018), but it is unclear how this generalizes to the entirety of the boom in the U.S. Understanding the drivers of the boom in the residential market and its consequent bust is important from both an academic and a policy-making perspective. To date, the role of expectations in forming the housing boom is still unknown.…”

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confidence: 99%