Study explores real factors behind declining housing prices

September 4, 2007

Housing prices are likely to fall further, but not for the reasons usually cited, according to an "Economic Commentary" published by the Federal Reserve Bank of Cleveland and co-authored by University of Wisconsin-Madison business faculty.

The study, titled "What's Really Happening with Housing Prices," notes that most of the public concern about housing markets is based on claims that house prices have increased at historically atypical rates and that house prices have outpaced incomes. The first claim is based on inaccurate historical data, says the study, while the second claim is linked to relaxed credit constraints.

Although some observers claim that housing prices increased at historically atypical rates from 1998-2006, there is a precedent. Using a different source of data, the commentary's authors - Morris Davis and Francois Ortalo-Magne from the UW-Madison School of Business and Peter Rupert of the Cleveland Reserve Bank - found a similar boom in housing prices from 1970-1980.

The researchers also say that relaxed credit constraints could explain why house price appreciation has outpaced incomes. House prices can, and should be expected to, surge if credit constraints are unexpectedly relaxed for first-time homebuyers who are credit or down-payment constrained. As the demand for starter homes increases, the prices of those homes also increase. Owners of starter homes enjoy capital gains, enabling them to trade up to a more expensive house. The increased demand for more expensive homes pushes up the prices of those homes.

As private mortgage originators tighten credit standards, the availability of subprime variable-rate mortgage programs will sharply curtail. This will reduce the demand for starter homes, causing their prices to fall. This, in turn, reduces the wealth of the current owners of starter homes, which triggers a chain-reaction decline in the price of trade-up homes.

The commentary is available online at www.clevelandfed.org/research/Commentary/2007/0707.cfm

Source: University of Wisconsin-Madison

Explore further: Where is solar power headed?

Related Stories

Where is solar power headed?

July 22, 2015

Most experts agree that to have a shot at curbing the worst impacts of climate change, we need to extricate our society from fossil fuels and ramp up our use of renewable energy.

In the UK, bPay offers fob, band or sticker options

June 29, 2015

Method of payment: "Cash or credit?" The two options sound so yesterday. In the UK, technology support in banking offers a new type of menu—band on the wrist, fob or sticker. The three new devices from UK Barclaycard were ...

Cubes, LED lighting and more spin magic into tiny house

June 11, 2015

Tiny house on wheels...what a concept. Some may scoff and say, "oh, you mean a mobile home in a trailer park." In 2015, when more than one tree hugger exists to say that we need to conduct a more eco-efficient, minimalist ...

Recommended for you

Can genes make us liberal or conservative?

August 4, 2015

Aristotle may have been more on the money than he realised in saying man is a political animal, according to research published Wednesday linking genes with liberal or conservative leanings.

Model shows how surge in wealth inequality may be reversed

July 30, 2015

(Phys.org)—For many Americans, the single biggest problem facing the country is the growing wealth inequality. Based on income tax data, wealth inequality in the US has steadily increased since the mid-1980s, with the top ...

Earliest evidence of reproduction in a complex organism

August 3, 2015

Researchers led by the University of Cambridge have found the earliest example of reproduction in a complex organism. Their new study has found that some organisms known as rangeomorphs, which lived 565 million years ago, ...

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.