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Financial Crisis and Credit Crunch in the Housing Market

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  • F. Wang
  • Ting Zhang

Abstract

We investigate the recent financial crisis with an emphasis on the interlock among housing, mortgage, and credit markets. Following Geanakoplos (Econometric Society Monographs 2:170–205, 2003 , 2010 ), we develop a model in which both prices of the mortgage and its collateral are simultaneously and endogenously determined. Our empirical tests confirm the model’s prediction that an adverse change in the risk free rate or the loan recovery rate can trigger the financial crisis as we observed. Finally, we discuss how the pro-cyclical leveraging practice by financial intermediaries can magnify their losses in mortgage-related assets and consequently cause significant contraction in the balance sheets of these firms. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • F. Wang & Ting Zhang, 2014. "Financial Crisis and Credit Crunch in the Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 49(2), pages 256-276, August.
    • Handle: RePEc:kap:jrefec:v:49:y:2014:i:2:p:256-276
    DOI: 10.1007/s11146-013-9421-4
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    References listed on IDEAS

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    2. Piotr Lis, 2015. "Relationships between the finance system and housing markets," Working papers wpaper99, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    3. Wang, F. Albert, 2022. "Double leverage cycle, interest rate, and financial crisis," Journal of Financial Stability, Elsevier, vol. 58(C).
    4. Brodowicz Dominika P., 2017. "Socially Responsible Property Investment in Cities – Between Economic Reasoning and Social Obligations," Real Estate Management and Valuation, Sciendo, vol. 25(2), pages 33-44, June.
    5. Dimitris Anastasiou & Panayotis Kapopoulos & Kalliopi-Maria Zekente, 2023. "Sentimental Shocks and House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 67(4), pages 627-655, November.

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