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I would like to thank Tam Bayoumi, Toni Gravelle, Kornélia Krajnyák, Martin Mühleisen, and Chris Towe for comments on earlier drafts, and Ben Sutton for his careful assistance in this project. All remaining errors are my own.
See Peek and Wilcox (2005) for further discussion of how the GSEs and secondary mortgage markets have moderated the cyclicality of mortgage flows.
The model is estimated in log differences, as is common in the literature on housing prices. Tests of regional housing prices and income do not find evidence of a cointegrating relationship, suggesting that a cointegrating equation may not be appropriate. See also Gallin (2003), who finds no cointegration between housing prices and income in metropolitan areas.
The availability of open land, as well as the presence of zoning restrictions may account for some of the regional differences in housing prices, including the more rapid appreciation in recent years in the mature cities of the East Coast and California (see McCarthy and Peach, 2004, and Glaeser and Gyourko, 2003).
Many observers have noted that the rapid rise in housing prices may more likely be followed by slow appreciation than a price collapse. See, for example, Case and Shiller (2003), Genesove and Mayer (2001), IMF (2003), IMF (2004), Macroeconomic Advisers (2004), McCarthy and Peach (2004). Angell and Williams (2005) find that booms may be followed by busts, but that “this pattern may be more the exception than the rule” (FDIC 2005).