The 2007-2009 Housing Crisis: Causes, Policy Responses and Long Term Implications

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This project will give us new insight into the determinants and long-term effects of the mortgage crisis experienced in the U.S. between 2007 and 2009. The team has already uncovered important facts about the distribution of mortgage debt and defaults in the years before and during the crisis that suggest that the real cause of the crisis was not subprime mortgages, but rather real estate investors. The team will therefore carry out a comprehensive study of the role of real estate investors during these years. The research will develop and test theories about how credit supply, housing demand, and expectations about housing prices affected investor behavior. The team will also analyze the effects of the mortgage crisis on people who were young adults during the crisis years. Tighter mortgage standards have made it harder for these families to purchase housing, while at the same time these young households have much higher student debt. This part of the research will measure the longer-run effects of the mortgage crisis on these young American families. The results of the project will help us understand the pros and cons of regulations affecting mortgage and housing markets.The research makes important contributions to the scientific understanding of housing and mortgage markets. It offers a comprehensive study of real estate investors. This class of borrowers has been overlooked in previous research because they are hard to identify in the data and because it is difficult to incorporate real estate investment in equilibrium models of the housing market. The results will help us understand whether investor activity affects fluctuations in house prices and will also demonstrate whether or not current credit scoring models adequately capture the default risk of investor mortgages. The research also gives us new insights on the long-term implications of the 2007-2009 crisis. Given the permanent effect of initial conditions on labor market outcomes, and the tight relation between the life cycle path of income and debt, we would expect lower lifetime earnings and mortgage balances for workers who first entered the labor market close to the crisis relative to previous cohorts. Two aggravating factors amplify this effect. First, based on the misplaced emphasis on subprime borrowers, low credit score households were all but excluded from mortgage markets, which especially hurt the young. Additionally, young households held unprecedentedly high levels of student debt in this period. This was driven by rising tuition, but also by the loss in net worth experienced by parents as a result of the crisis.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.