Économie et Statistique n° 438-439-440 - 2010Aspects of the crisis
Understanding the Formation of the U.S. Real-Estate Bubble, and Why it Burst
The economic and financial crisis of the late 2000s began with the bursting of a speculative bubble in the U.S. real-estate market. This article uses two econometric methods to explain the main mechanisms at work in the growth and collapse of the bubble. The first method allows us to determine “fundamental” real-estate prices and household residential investment, and to quantify the bubble's size. The model suggests that prices were overvalued by a maximum of approximately 50% in 2006, and that residential investment had been running at about 20% above its fundamental level for several years. The second model affords a better understanding of the trends observed in real-estate prices and residential investment. It is based on the first model but incorporates specific variables to take account of the role played by the deterioration in real-estate loan quality during the bubble's formation, as well as by the wave of home repossessions after the bubble burst. In particular, it provides evidence for the argument that the bubble was mainly due to worsening loan quality, itself a consequence of poorly controlled financial innovations in the mortgage-loan market.