Journal of Applied Finance & Banking

A Housing Bubble Debate Resolved

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• Abstract

  Given the financial crisis and sharp declines in the housing market during the past decade, there is little doubt that a bubble occurred and then burst. In 2009, two articles were published that argue on opposite sides of the Federal Reserve‟s role in the recent housing bubble and ensuing crisis. White [16] accuses the Federal Reserve of public policies which h distorted interest rates and asset prices, ultimately driving financial institutions into unsustainable positions. Kirchner [12], on the other hand, defends the Federal Reserve‟s actions. This research ends the debate about the impact of the mortgage interest rates on the housing boom and the economy‟s collapse. In earlier research, the 30-year conventional mortgage rate was shown to have little bearing on the crisis. The current study uses the one-year adjustable rate mortgage to test whether these lower rates had more influence than the fixed-rate mortgage. In all final models, interest rates were not a contributing factor to the bubble. Because of the co-dependence of many of the factors, structural equation modeling (SEM) is used rather than traditional regression analysis. This technique addresses the difficulties presented by the high levels of multi-co-linearity and autocorrelation present in many of the factors.