Affordability, financial innovation and the start of the housing boom

Dokko, Jane K., Keys, Benjamin J. and Relihan, Lindsay (2019) Affordability, financial innovation and the start of the housing boom. CEP Discussion Papers (CEPDP1611). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

At their peak in 2005, roughly 60 percent of all purchase mortgage loans originated in the United States contained at least one non-traditional feature. These features, which allowed borrowers easier access to credit through teaser interest rates, interest-only or negative amortization periods, and extended payment terms, have been the subject of much regulatory and popular criticism. In this paper, we construct a novel county-level dataset to analyze the relationship between rising house prices and non-traditional features of mortgage contracts. We apply a break-point methodology and find that in housing markets with breaks in the mid-2000s, a strong rise in the use of non-traditional mortgages preceded the start of the housing boom. Furthermore, their rise was coupled with declining denial rates and a shift from FHA to subprime mortgages. Our findings support the view that a change in mortgage contract availability and a shift toward subprime borrowers helped to fuel the rise of house prices during the last decade.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2019 The Authors
Divisions:	Geography & Environment
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies R - Urban, Rural, and Regional Economics > R2 - Household Analysis > R21 - Housing Demand R - Urban, Rural, and Regional Economics > R2 - Household Analysis > R22 - Other Demand
Date Deposited:	11 Jun 2019 15:15
Last Modified:	05 Mar 2024 15:45
URI:	http://eprints.lse.ac.uk/id/eprint/101017

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