The Housing Bubble and the Loanable Funds Market

1
The Housing Bubble and the Loanable Funds Market

• Presented By
• Amy Dobson
• Christine Choi
• Robert Newell
• Ivan Atroshenkov

2
Where the Book Leaves Off

• Chapter 13 Discusses
• Origins of Mortgages
• Regulation of the Market
• Collapse of SLs
• Securitization of Mortgages
• Formation of the Secondary Market

3
And Where We Begin

• Macroeconomic Effects
• Consumption
• Financial Sector
• Household Debt

• Demand for Loanable Funds
• Second Mortgages
• Home Equity Loans
• HELOC
• Exotic Mortgages

4
Macroeconomic Effects

• Consumption
• Financial Sector
• Household Debt

5
Consumption Homeowners

• Housing prices are positively correlated with
  consumption
• Increase in asset value increases expected income
  
• Homeowners wish to spend the anticipated future
  income immediately

6
Consumption Financial Institutions

• If homeowners are spending more now, they are
  saving less
• Homeowners spend future income now by taking out
  home equity loans

7
The Financial Sector

• No change in the value of assets
• Increase default rate
• Increase in relative riskiness of loans

8
Household Debt

• Home equity loans
• Credit cards vs. equity loans
• Tighter lending requirements

9
Secondary Mortgages

• Increased Demand for Loanable Funds
• Home Equity Loans
• Home Equity Line Of Credit (HELOC)
• Second Mortgages

10
Exotic Mortgages

• Piggy back (80/20)
• Interest only
• Adjustable Rate Mortgage (ARM)
• Negative Amortization
• Pay Option ARM

11
How Can We Respond to a Bubble?

• Why is it always problematic to respond to
  potential bubbles?

12
Conclusion

• Different kinds of the policy tools
• Stabilization Policy
• Public Policy
• Price Controls
• Increase in public housing investments
• Policy to curb speculation

13
Test Question

• How does a housing bubble increase the risk of a
  banks assets?
• a. Higher interest rate
• b. Higher default rate
• c. Fewer deposits
• d. Lower reserves at the Fed

14
References

• Shaheen Pasha, Housing bubble may lose some
  wind, October 21, 2005, 5/10/
• 21/real_estate/exotic_mortgages_prices/
  (October 30, 2005).
• Marc Labonte, U.S. Housing Prices Is There a
  Bubble?, May 16, 2003, .house.
• gov/UploadedFiles/Housing20-20Is20There20a20
  Bubble.pdf (October 30, 2005).
• Dave Iverson, Economic Dreams Economic
  Nightmares, http//forestpolicy.typepad.com/econo
  mics/2005/07/inefficient_mar.html (October 30,
  2005).