![]() Tightened lending standards have kept homebuyers from becoming overly leveraged and lessened the risk that they’ll find themselves with an underwater loan even if prices level off or shrink a bit from today’s historic highs. It wasn’t just one thing, but it’s vital to know how each factor fed into the crisis so that housing and lending policy can be accurately crafted to prevent another collapse, Conklin said. Rapidly rising home prices fueled “a buy now or miss out” mentality among families and investors. Homeowners who had subprime loans defaulted on their loans. Exotic loans that required little documentation or featured variable interest rates helped people buy homes they didn’t have the income to afford. Many factors led to the 2008 housing crash, Conklin said. “The marginal buyers were priced out of the market they didn’t get a chance to help house prices blow up because the borrowers with better credit scores and better incomes could bid the highest prices.” What caused the housing crash? “ borrowers were probably able to bid higher than people we would consider marginal borrowers. “And the places where we saw prices rising quickly, that’s where we saw prime borrowers were a larger part of the market,” Conklin said. Subprime borrowers were more likely to take out loans to buy entry-level or moderately priced houses in the overheated market, he said. There’s no doubt that people with lower credit scores defaulted more but they weren’t driving up prices.” -James Conklin If subprime lending was the driver of the housing boom, well then you would think that where house prices rose, you would have seen the largest growth in subprime lending and that’s just not what we found.” “We looked at the areas where house prices grew and the areas where the number of subprime mortgages grew,” Conklin said. “There’s no doubt that people with lower credit scores defaulted more but they weren’t driving up prices.”Ĭonklin’s team looked county by county at the percentage of loans issued to borrowers with credit scores under 660 across the U.S. “Our take is that the people with the low-credit scores don’t seem to be driving the housing boom,” Conklin said. Housing Boom.” The paper appeared in the July 2022 edition of the Journal of Financial Intermediation. Scott Frame, Kristopher Gerardi and Haoyang Liu, published their findings in “ Villians or scapegoats? The role of subprime borrowers in driving the U.S. That doesn’t seem to be the case.”Ĭonklin and his coauthors, Federal Reserve Bank economists W. “Then there was an inflow of easy credit and it allowed those people to push prices up to unsustainable levels. “I think a lot of people have the scenario in their head that there was this big pool of people with low credit scores who couldn’t buy before this time,” Conklin said. ![]() Subprime loans are loans given to borrowers who may have difficulty with repayment due to low credit scores and income. James Conklin, an associate professor of real estate at UGA’s Terry College of Business, wanted to test a common perception about the crisis - that the prevalence of subprime loans led to unwarranted and unsustainable housing values.
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