The Real Effects of Credit Booms and Busts: A County-Level Analysis

We use a comprehensive data set of home hortgage loan originations from HMDA matched with the banks’ income and balance sheet statements to analyze how fluctuations in the supply of mortgage credit affect county-level economic outcomes. To isolate fluctuations in the supply of mortgage credit, we use a variant of the shift-share identification approach of Greenstone et al. (2015), which exploits the fact that banks originate home mortgage loans across multiple coun- ties. Our results indicate that in “booms,” changes in the supply of home mortgage credit have no effect on a range of county-level economic outcomes, including house prices, employment, wages, and income. During “busts,” by contrast, a supply-induced contraction in mortgage lending has significant—in both economic and statistical terms—adverse effects on county-level economic performance: During the 2007–2010 period, counties that experienced a reduction in the supply of mortgage credit also saw large declines in house prices and building permits, a decline in the employment-population ratio, an increase in the unemployment rate, and a drop in average wages and income per capita. Consistent with the presence of financial frictions, the pullback in the supply of mortgage credit led to a particularly severe job losses at small and young firms.