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The paper shows that places that had high mortgage rejection rates in the middle 1990s had higher than average price increase in the first half of this decade. The reason: the development of subprime enabled those who were preciously shut out of the housing market to enter the housing market. An important inference: looser credit standards got capitalized into house prices. This is an important lesson for the development of mortgage finance around the world: liberalizing credit not only increases the ability of people to buy houses, it makes houses more expensive.
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1 comment:
this is the other side of the story that Paul Willen talks about. When he says that the foreclosure mess is driven by house price declines, you have to mention that the price increases (i.e. the housing bubble) was driven by looser credit standards. consequently, the foreclosure mess is still a result of subprime lending.
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