Housing Bubble in the United States

Abstract

This theoretical paper captures the dynamics of post-2000 housing price evolution in the United States by modeling the interaction between credit borrowers and lenders. Through securitization, banks and other financial intermediates were able to supply more credit to potential home buyers. In an infinite time horizon model, we model the financial intermediate’s decision making of loans and liquidation as well as borrowers’ voluntary default. We employ Bellman equation to describe economic agents’ calculation of expected payoffs. We simulate the model and produce dynamics of housing supply, housing demand, housing price and mortgage rate over time.