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SERC/Urban and Spatial Programme Discussion Paper
Shifting Credit Standards and the Boom and Bust in U.S. House Prices
John V. Duca, John Muellbauer and Anthony Murphy
March 2011
Paper No' SERCDP0076:
Full Paper (pdf)

JEL Classification: R31; G21; E51; C51; C52

Tags: house prices; credit standards; subprime mortgages

The U.S. house price boom has been linked to an unsustainable easing of mortgage credit standards. However, standard time series models of US house prices omit credit constraints and perform poorly in the 2000’s. We incorporate data on credit constraints for first time buyers into a model of US house prices based on the (inverted) demand for housing services. The model yields not only a stable long-run cointegrating relationship, a reasonable speed of adjustment, plausible income and price elasticities and an improved fit, but also sensible estimates of tax credit effects and the possible bottom in real house prices.