An Examination of the Influence of Financial Interventions on Household Decision-Making in the U.S. Housing Market

Systems 2015, 3, 378-398; doi:10.3390/systems3040378

21 Pages Posted: 30 Aug 2018

See all articles by Purba Mukerji

Purba Mukerji

Connecticut College

Khalid Saeed

Worcester Polytechnic Institute (WPI)

Neal Tan

Connecticut College

Date Written: 2015

Abstract

This paper investigates the impact of what the extant literature has come to view as some of the major causes of the 2007 US housing market crisis. In particular we investigate the hypothesized effect of, lax financial regulations, the “savings glut” that is invested in the US from abroad, government support for increased home ownership, rising homeowners’ equity due to the real-estate boom, expansionary monetary policy, and bankruptcy reform. We examine how these hypothesized causes, working through household and institutional level decision-making, based on information availability and incentives, influenced the outcomes in the market for homes. Using a system dynamics model of household finance, we overlay the hypothesized causes chronologically to extrapolate their real-world simultaneous impact and test the hypothesis that they could have together led to the crisis, by simulating and checking against observed data. We find that with the exception of lax financial regulations, each cause by itself provides only a partial explanation of the crisis. Interestingly, the controversial expansionary monetary policy of the Federal Reserve, blamed by some for fueling the crisis, actually prevents the housing market boom from becoming too large. However on the downside, it discourages household savings and causes the fall in home prices to be deeper, due to weak household finances that result from low savings. We confront our model’s assumptions and outcomes with US economic data. We find our model assumptions are justified and simulation results are strongly supported by the data.

Keywords: Household Financial Decisions; US Housing Crisis

JEL Classification: G02; C61

Suggested Citation

Mukerji, Purba and Saeed, Khalid and Tan, Neal, An Examination of the Influence of Financial Interventions on Household Decision-Making in the U.S. Housing Market (2015). Systems 2015, 3, 378-398; doi:10.3390/systems3040378 , Available at SSRN: https://ssrn.com/abstract=3107140

Purba Mukerji

Connecticut College

New London, CT 06320
United States

Khalid Saeed (Contact Author)

Worcester Polytechnic Institute (WPI) ( email )

100 Institute Road
Worcester, MA 01609
United States

Neal Tan

Connecticut College ( email )

New London, CT 06320
United States

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