Subprime Mortgage Crisis: Causes and Consequences

2009

This article examine in synthesis the interpretations between the monetary policy antecedent the Subprime crisis, and the explosion of the crisis. Starting from the recent Taylor's comments are examined the measures adopted by the FED and the consequent effects.

2008

academia

This research study attempts to identify housing price fluctuation in U.S.A and identifies some of the more clear-cut reasons for the 2007 sub-prime crisis. The research study accomplished its program by answering its two main hypotheses. Hypothesis I: housing prices decline was caused by several economic factors that placed a simultaneous downward pressure on house prices. Hypothesis II: The sub-prime financial crisis was a result of a more chronic problem than mere decline in house prices. Decline in house prices were indeed a prod to “a debt laden apparatus”. The study tries to explain variations in house prices using an economic model developed using a demand and supply framework for housing prices (dependent variable) and seven strong predictor variables (independent variables) using multiple regression (Model I – causes of house price fluctuations). The independent variables are household income, employment over population ratio, vacancy, rent, number of new constructions, mortgage interest and past prices. It identifies four elements that explain house price variations. These are employment over population ratio, vacancy rate, rent and lagging prices. Modified model I identifies employment per population as main factor to house price fluctuations. It also identifies vacancy rate and lagging prices as having significant impacts on house price trend. The last of the four, rent index has been found to have minimum effect of less than 1 percent explanatory power for house price variability. The second model, Model II (causes of sub-prime mortgage crises) tries to identify main culprits in mortgage related financial crises. In this section, the study tries to find commonality between “Savings and loan” crisis (1986-1995) and Sub-prime mortgage crisis (2007/2008). Using Variance Inflation Factor (VIF) we reduce independent variables to four do to cases of multicollinearity. On initial run model II would not satisfy test of ‘goodness of fit’ or model validity conducted using chi-square and likelihood function. A revised model, Modified model II incorporating only sub-prime mortgage financial crisis and limiting its duration to year 2007, results in a robust model with explanatory power (r^2)of 48.09 percent. The four independent variables identified as a cause for the sub-prime financial crisis are mortgage loan to value (LTV), mortgage application approval rate, spread of mortgage to prime rate and household savings. This outcome is in agreement with our initial hypothesis of “credit” driven real estate market. Keywords: Sub-prime mortgage crisis, residential house prices and economic fundamentals

Brookings Papers on Economic Activity, 2009

International Journal of Scientific Research and Management

Subprime mortgage crisis is a phenomenon that has a major impact on the world economy. The crisis that began in the United States has infected many other economically related countries with the United States. This study tries to parse how the economic conditions of the United States in the era before and after the crisis. From the results of the descriptive statistical analysis test on the economic conditions of the United States in the period 1998 - 2017, it was found that in the variables of inflation, investment, GDP, and interest rates there were negative differences between before and after the crisis, even though statistically did not show a significant effect, except for interest rate variable. This phenomenon shows that monetary policy oriented to controlling interest has the potential to trigger systemic risks to the economy.

Economic Letter, 2007

Journal of Housing Economics, 2008

This research study attempts to identify housing prices fluctuation in U.S.A and identifies some of the more clear-cut reasons for the 2007 sub-prime crisis. The research study accomplished its program by answering its two main hypotheses. Hypothesis I: housing prices decline was caused by several economic factors that placed a simultaneous downward pressure on house prices. Hypothesis II: The sub-prime financial crisis was a result of a more chronic problem than mere decline in house prices. Decline in house prices were indeed a prod to “a debt laden apparatus”. The study tries to explain variations in house prices using an economic model developed using a demand and supply framework for housing prices (dependent variable) and seven strong predictor variables (independent variables) using multiple regression (Model I – causes of house price fluctuations). The independent variables are household income, employment over population ratio, vacancy, rent, number of new constructions, mortgage interest and past prices. It identifies four elements that explain house price variations. These are employment over population ratio, vacancy rate, rent and lagging prices. Modified model I identifies employment per population as main factor to house price fluctuations. It also identifies vacancy rate and lagging prices as having significant impacts on house price trend. The last of the four, rent index has been found to have minimum effect of less than 1 percent explanatory power for house price variability. The second model, Model II (causes of sub-prime mortgage crises) tries to identify main culprits in mortgage related financial crises. In this section, the study tries to find commonality between “Savings and loan” crisis (1986-1995) and Sub-prime mortgage crisis (2007/2008). Using Variance Inflation Factor (VIF) we reduce independent variables to four do to cases of multicollinearity. On initial run model II would not satisfy test of ‘goodness of fit’ or model validity conducted using chi-square and likelihood function. A revised model, Modified model II incorporating only sub-prime mortgage financial crisis and limiting its duration to year 2007, results in a robust model with explanatory power (r^2)of 48.09 percent. The four independent variables identified as a cause for the sub-prime financial crisis are mortgage loan to value (LTV), mortgage application approval rate, spread of mortgage to prime rate and household savings. This outcome is in agreement with our initial hypothesis of “credit” driven real estate market.