Daily read: A Unified Credit Expansion Theory on Housing Cycle: Causal Evidence...
A Unified Credit Expansion Theory on Housing Cycle: Causal Evidence for Within- and Cross-Metro Patterns in the Prior, Boom, Bust, and Recovery Periods
arXiv paper (q-fin.GN) · Bo Li
During the 1999-2019 U.S. housing cycle, three empirical facts present a puzzle: in the boom period, the correlation between income growth and mortgage growth is (1) negative across ZIP codes within a metropolitan area, but (2) positive across metropolitan areas, and (3) the metropolitan areas that experience the worst bust also show the strongest recovery. I develop a unified credit expansion theory that explains both within- and cross-metro patterns in the prior, boom, bust, and recovery periods (including the three facts above) and generates new testable implications of double differences" (cross ZIP codes and cross metros) for the four periods. Following the idea ofEconomic Base Theory", I construct local economic exposure to net export growth as the driving force of local economy and credit expansion. For the identification strategy, I use a new instrumental variable approach from the International trade literature for the following empirical results. First, I show that high-net-export-growth metros experience a stronger boom-bust-recovery housing cycle due to credit expansion in private-label mortgages (PLMs), rather than in government-sponsored enterprise mortgages (GSEMs), because only the former can legally respond to local economic conditions. Second, for the ``double differences", I define a low-minus-high (LMH) factor as the private-label mortgage (and house...