Residential House Prices, Commercial Real Estate and Bank Failures

Abstract

The Great Recession resulted in bank failures that exceeded the savings and loan (S&L) crisis in terms of percentage of institutions and the volume of assets of banks that failed. While much of the literature focuses “subprime” mortgages and its role in this financial crisis, we focus on the effects of residential housing prices. While construction and development loans have typically been a major cause of bank failures, we show that construction and development loans are significant in explaining bank failures through 2011 but regional residential house price movements have been significant through 2014. Furthermore, we show how the regional residential HPI values have significant effects over the Great Recession, particularly in the South Atlantic and Pacific states (better known as the “sand states”).

Keywords: Financial Crisis, Subprime, Bank Failure, Construction

JEL Classification: G21, O18