Edward Conard

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Upside of Inequality Oxford Unintended Consequences

W. Scott Frame Federal Reserve Bank of New York
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Contrary to the traditional narrative, the 2000s housing boom was primarily driven by prime borrowers, not subprime ones.

Contrary to the traditional narrative, the housing boom of the 2000s was primarily driven by prime borrowers, not subprime ones. Data from the Federal Reserve Bank of New York indicates that county-level house price growth negatively impacted the share of subprime purchase mortgage lending between 2002 and 2006. This suggests a "pricing out" effect where high house price appreciation made properties unaffordable for subprime borrowers, reducing their likelihood of homeownership. The analysis reveals that rapid U.S. house price appreciation was mainly driven by prime borrowers, challenging the view that subprime lending fueled the boom. Consequently, policy measures focusing solely on limiting credit access for marginal borrowers may be inadequate to prevent future housing booms.

FRBNY reports that housing prices in run up to the crisis were primarily driven by prime borrowers,

“….Our findings run counter to the traditional narrative of the 2000s housing boom: namely, that the growth in subprime home purchases led to the growth in house prices. One potential explanation for the negative correlation is reverse causality. That is, high house price appreciation may have made property increasingly unaffordable for subprime borrowers, leading to a “pricing out” effect. We present evidence in our paper that county-level house price growth had a negative and economically meaningful causal effect on the growth in the share of subprime purchase mortgage lending at the county level between 2002 and 2006. Moreover, using the Federal Reserve Bank of New York Consumer Credit Panel, we find that higher house price growth lowered the relative likelihood of a subprime individual becoming a homeowner. Taken together, these findings are consistent with a pricing out effect….. Our findings run counter to the prevailing view of the U.S. housing boom in the first decade of this century. Specifically, we reveal that house price growth during this period was negatively correlated with the growth in home purchase lending to subprime borrowers. We further provide evidence consistent with this being a result of subprime borrowers being priced out of rapidly appreciating markets. We also show that seemingly fraudulent activities were not overly concentrated among subprime borrowers. Our analysis contributes to a “new narrative” that rapid U.S. house price appreciation during the 2000s was mainly driven by prime borrowers.Hence, policy prescriptions intended to limit access to credit for marginal borrowers may be insufficient by themselves to prevent a future housing boom…”

James Conklin, W. Scott Frame, Kristopher Gerardi, and Haoyang Liu, "Did Subprime Borrowers Drive the Housing Boom?," Federal Reserve Bank of New York, February 26, 2020, https://libertystreeteconomics.newyorkfed.org/2020/02/did-subprime-borrowers-drive-the-housing-boom.html

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