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Credit Supply and the Housing Boom

date Date: February 1, 2015
date Author(s): Alejandro Justiniano, Giorgio E. Primiceri, and Andrea Tambalotti
date Affiliation: Federal Reserve Bank of New York

The housing boom that preceded the Great Recession was the result of an increase in
credit supply driven by looser lending constraints in the mortgage market. This view on
the fundamental drivers of the boom is consistent with four empirical observations: the
unprecedented rise in home prices, the surge in household debt, the stability of debt
relative to home values, and the fall in mortgage rates. These facts are difficult to
reconcile with the popular view that attributes the housing boom to looser borrowing
constraints associated with lower collateral requirements. In fact, a slackening of
collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust


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