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Did Credit Market Policies Cause the Housing Bubble?

May 5, 2010
Edward Glaeser (Harvard University) Joshua Gottlieb (Harvard University) and Joseph Gyourko (Wharton School, University of PA)

This policy brief is based on the article, "Can Interest Rates and Easy Mortgage Credit Explain the Housing Boom?" and was released in conjunction with the "Understanding the Housing Collapse: What is to Blame and What Can Be Done? conference at the Federal Reserve Bank of Boston that was co-sponsored by the Federal Reserve Bank's Research Department and its New England Public Policy Center, the Rappaport Institute for Greater Boston, and the Taubman Center for State and Local Government.

Many economists have argued that aspects of the credit market, including low interest rates, can explain the boom. The evidence summarized in this Policy Brief casts doubt on the view that easy credit can explain the bubble. It isn’t that low interest rates don’t boost housing prices. They do. It isn’t that higher mortgage approval rates aren’t associated with rising home values. They are. But the impact of these variables, as predicted by economic theory and as estimated empirically over many years, is too small to explain much of the housing market event that we have just experienced.

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