More Housing ‘Bubble’ Myth Busting

IMF research points to the role of mortgage securitisation in reducing deviations in house prices from fundamentals:

With funding conditions now determined in a national market, trends in real activity and prices have become less cyclical and converged across all regions of the United States. As a result, a model of housing prices based on economic fundamentals finds that pricing errors—the deviations of actual prices from those estimated in the model—have fallen by half. Moreover, a change in homebuilders’ behavior—in particular, a move away from speculative starts and a reduction of levels of inventories of new homes—has reduced the risk of a sharp decline in housing prices, although some indicators suggest speculative pressures in a number of metropolitan areas. This stabilization of housing activity may have made an important contribution to the reduction of the volatility of GDP growth over the same period.

posted on 31 October 2005 by skirchner in Economics

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