Housing Market Report

A major driver of the current financial crisis is the burst housing bubble; many have asked the question, why did the housing market collapse?

The Atlanta Fed Reserve attempts to answer this question in a new study, "Decomposing the Foreclosure Crisis: House Price Depreciation versus Bad Underwriting." In this study, the authors build a model employing exhaustive housing and mortgage data from the past two decades, and then focus on the housing market experience in Massachusetts to try to gain some insight into root causes. The authors come to an interesting conclusion:

We argue that relaxed underwriting standards did severely aggravate the crisis by creating a class of homeowners who were particularly vulnerable to the decline in prices. But, as we show in our counterfactual analysis, that emergence alone, in the absence of a price collapse, would not have resulted in the substantial foreclosure boom that was experienced.