Adam J. Levitin

Georgetown University Law Center

Susan M. Wachter

University of Pennsylvania – The Wharton School – Real Estate Department

August 31, 2012

Housing Policy Debate, Vol. 23, 2012
U of Penn, Inst for Law & Econ Research Paper No. 12-28
Georgetown Law and Economics Research Paper No. 2114620
Georgetown Public Law Research Paper No. 2114620

Why Housing?

Abstract:

What made housing vulnerable to a bubble? And why has the housing market been so impervious to attempts at resuscitation?

This Article critically reviews the theories of the housing bubble. It argues that housing is unusually susceptible to booms and busts because credit conditions affect demand and because the market is incomplete and difficult to short. Housing market distress transmits to the macroeconomy through a balance sheet channel, a construction channel, and a collateral channel.

Housing is unique as an asset class in that it is both a consumption and investment good. It is also the largest single consumer asset and debt class. Because housing is credit-backed and such a large asset class, failure will impact the financial system itself and pull down the economy as a whole. The dual-use of housing, its ubiquity on consumer balance sheets, its highly correlated pricing, and its linkage to the macroeconomy make it a particularly painful type of asset bubble to deflate.

The credit-backed nature of housing is also the key to understanding why there was a bubble. We argue that the bubble must be understood as stemming from the change in the mortgage financing channel from Agency securitization to private-label securitization (PLS). This shift enabled financial intermediaries — economic, but not legal agents of borrowers and investors — to exploit the information problems inherent in PLS for their own short-term gain. In other words, a set of agency problems in financial intermediation was the critical factor in fomenting the housing bubble.

Copy of paper below…

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4closureFraud.org

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Why Housing?