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Leaning against housing booms fueled by credit

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  • Carlos Cañizares Martínez

    (Department of Economic and Monetary Analysis, National Bank of Slovakia, Slovakia; Rimini Centre for Economic Analysis)

Abstract

The aim of this paper is to empirically identify the state of the US housing market and to set state-dependent policy rules to smooth the housing cycle. I do so by estimating a three states Markov-switching model of housing prices in which mortgage debt is the state-dependent variable. As a result, the housing market state might be classified as being in housing booms fueled by credit, normal or implosion times. Second, I propose a state-contingent policy rule fed with the probabilities of being in each state. I apply such rule to set a housing counter-cyclical capital buffer (SCCyB) and a time-varying home mortgage interest deduction rule. Finally, I show that such rules have forecasting ability to predict the charge-off rates on real estate residential loans. The significance of this study is that it informs policymakers about the state of the housing market mechanically while it also provides a simple rule that allows the implementation of state-contingent macroprudential policy. Further, the structure of such rule is general enough to be applied to other policy tools.

Suggested Citation

  • Carlos Cañizares Martínez, 2023. "Leaning against housing booms fueled by credit," Working Paper series 23-04, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:23-04
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    More about this item

    Keywords

    Housing prices; non-linear modeling; Markov switching model; housing demand; household debt; macroprudential policy;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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