Academic journal article Monthly Labor Review

When One Door Opens: The Housing Boom and Monetary Policy

Academic journal article Monthly Labor Review

When One Door Opens: The Housing Boom and Monetary Policy

Article excerpt

The housing industry is largely used by consumers and policymakers as a signal of how well the economy is doing. Often, especially in real estate circles, the housing boom is known as a time of mass prosperity and economic gain. Although people still view the housing boom with "rose-colored" glasses, the conditions that fostered the housing boom and the subsequent housing bubble burst are being studied as possible guides for future monetary policy.

The housing boom occurred between 2003 and 2006 when the Federal Reserve (the Fed) raised rates by 4.25 percent, access to mortgages was high, and lending standards were lax. In "How monetary policy shaped the housing boom" (National Bureau of Economic Research, Working Paper 25649, March 2019), Itamar Drechsler, Alexi Savov, and Philipp Schnabl seek to determine the evidentiary support that monetary policy may have had in nurturing the boom, which led to the bubble bursting.

The Fed raised rates and, naturally, the banks contracted because their deposits were not enough to cover previous levels of loan production and origination. This contraction enabled nonbank entities to swoop in and expand the market of private-label securitization loans, counteracting the banks contraction and increasing the fragility of the mortgage market. Private loans have less stringent standards than government-backed (government-insured) mortgages and most people who applied were granted access to these loans. Ultimately, the authors find that the Fed's tightening led banks to increase their deposit spreads and contract their mortgage lending portfolio, in turn influencing private lenders to increase the availability of private loans to offset the government-sponsored enterprises mortgage-lending contraction.

The Fed's tightening had little effect on total mortgage lending but opened the doors for substitutions between government-sponsored lending and private lending. …

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