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A housing bubble debate resolved

Given the financial crisis and sharp declines in the housing market during the past decade, there is little doubt that a bubble occurred and then burst. In 2009, two articles were published that argue on opposite sides of the Federal Reserve‟s role in the recent housing bubble and ensuing crisis. White [16] accuses the Federal Reserve of public policies which h distorted interest rates and asset prices, ultimately driving financial institutions into unsustainable positions. Kirchner [12], on the other hand, defends the Federal Reserve‟s actions. This research ends the debate about the impact of the mortgage interest rates on the housing boom and the economy‟s collapse. In earlier research, the 30-year conventional mortgage rate was shown to have little bearing on the crisis. The current study uses the one-year adjustable rate mortgage to test whether these lower rates had more influence than the fixed-rate mortgage. In all final models, interest rates were not a contributing factor to the bubble | Journal of Applied Finance Banking vol. 3 no. 4 2013 55-72 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2013 A Housing Bubble Debate Resolved Sarah K. Bryant1 and Jonathan W. Kohn2 Abstract Given the financial crisis and sharp declines in the housing market during the past decade there is little doubt that a bubble occurred and then burst. In 2009 two articles were published that argue on opposite sides of the Federal Reserve s role in the recent housing bubble and ensuing crisis. White 16 accuses the Federal Reserve of public policies which h distorted interest rates and asset prices ultimately driving financial institutions into unsustainable positions. Kirchner 12 on the other hand defends the Federal Reserve s actions. This research ends the debate about the impact of the mortgage interest rates on the housing boom and the economy s collapse. In earlier research the 30-year conventional mortgage rate was shown to have little bearing on the crisis. The current study uses the one-year adjustable rate mortgage to test whether these lower rates had more influence than the fixed-rate mortgage. In all final models interest rates were not a contributing factor to the bubble. Because of the co-dependence of many of the factors structural equation modeling SEM is used rather than traditional regression analysis. This technique addresses the difficulties presented by the high levels of multi-co-linearity and autocorrelation present in many of the factors. JEL classification numbers G01 G21 Keywords Mortgage markets Housing bubble Financial crisis Housing market Mortgage rates Structural equation modeling 1Professor of Finance Department of Finance Supply Chain Management John L. Grove College of Business Shippensburg University. 2Professor of Supply Chain Management Department of Finance Supply Chain Management John L. Grove College of Business Shippensburg University. Article Info Received February 9 2013. Revised March 16 2013. Published online July 1 .