Home financing loans and their relationship to real estate bubble: An analysis of the U.S. mortgage market

Asadov, Alam and Masih, Mansur (2016): Home financing loans and their relationship to real estate bubble: An analysis of the U.S. mortgage market.

Abstract

It is well reported that the much fluctuations in Real Estate (RE) markets globally are a result of unequal risk burden caused by deficiencies of financial system and speculative nature of those markets. However, the evidence is mixed in terms of whether high house prices lead to over financing of mortgages or vice versa. This work attempted to resolve this issue by using ARDL approach handy to use for time series data for the United States. The empirical results of the work have some noteworthy theoretical and policy implications. In the short run, house prices seem to be causing an increase in money supply and influencing house financing decisions. However in the long run, availability of new mortgage loans and interest impact seem to dominate. Thus, the implication from the study suggests that we have to consider both the short and the long run aspects of policy and its influence on all sectors of the economy while making such policy decisions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Causality, mortgage rate, real estate, ARDL
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location

References

Davis, E. P., & Zhu, H. (2011). Bank lending and commercial property cycles: Some crosscountry evidence. Journal of International Money and Finance, 30(1), 1–21.

Égert, B. & Mihaljek, D. (2007). Determinants of house prices in central and eastern Europe. BIS Working Papers No 236.

Goodhart, C., & Hofmann, B. (2008). House prices, money, credit, and the macroeconomy , Oxford Review of Economic Policy, 24(1), 180 - 205.

Hott, C., & Monnin, P. (2006). Fundamental Real Estate Prices : An Empirical Estimation with International Data Swiss National Bank (NCCR Finrisk No. 356).

Johnson, L.D. & Neave, E.H. (2008). The subprime mortgage market: familiar lessons in a new context. Management Research News, 31(1), 12-26.

Lamont, O. & Stein, J.C. (1999). Leverage and House Price Dynamics in U.S. Cities. Rand Journal of Economics, Vol. 30 (Autumn), 498–514.

Mirakhor, A. & Krichene, N. (2009). Recent crisis: lessons for Islamic finance. Journal of Islamic Economics, Banking and Finance, 5 (1), 9-58.

Mohd-Yusof, R., H-Kassim, S., A-Majid, M.S. and Hamid, Z. (2011). Determining the viability of rental price to benchmark Islamic home financing products: evidence from Malaysia. Benchmarking: An International Journal, 18(1), 69-85.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16 (3), 289–326.