How Did the US Housing Slump Begin? Role of the 2005 Bankruptcy Reform

41 Pages Posted: 16 Mar 2012

See all articles by Ulf von Lilienfeld-Toal

Ulf von Lilienfeld-Toal

Luxembourg School of Finance

Dilip Mookherjee

Boston University - Department of Economics

Date Written: April 19, 2011

Abstract

Most analyses of the recent financial crisis in the US focus on the consequences of the dramatic slump in housing prices that started in the mid-2000s, which led to rising mortgage defaults, shrinking home equity credit and liquidity in the banking system. Yet these accounts do not explain what caused the reversal of housing price growth in the first place. This paper argues that the passage of the 2005 Bankruptcy Reform Act (BAPCPA) contributed significantly to the reversal. The reform generated negative wealth effects for a category of homeowners, lowering prices of their homes, which spread via a process of contagion to the prices of other homes. Evidence consistent with this hypothesis is provided: changes in housing prices and mortgage interest rates at the MSA level following the reform were significantly correlated with BAPCPA-exposure. The results are robust to controls for the size of the pre-2005 price growth, local unemployment rates, rates of new home construction and home vacancies, apart from MSA, house and year dummies.

Suggested Citation

Lilienfeld-Toal, Ulf von and Mookherjee, Dilip, How Did the US Housing Slump Begin? Role of the 2005 Bankruptcy Reform (April 19, 2011). Available at SSRN: https://ssrn.com/abstract=2023224 or http://dx.doi.org/10.2139/ssrn.2023224

Ulf von Lilienfeld-Toal (Contact Author)

Luxembourg School of Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511
Luxembourg

Dilip Mookherjee

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-4392 (Phone)
617-353-4143 (Fax)

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