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ISRN Economics
Volume 2013 (2013), Article ID 250459, 16 pages
http://dx.doi.org/10.1155/2013/250459
Research Article

Dynamics of Housing Price: Foreclosure Rate Interactions

Department of Economics, University of Illinois at Chicago, Chicago, IL 60680, USA

Received 6 August 2013; Accepted 10 September 2013

Academic Editors: D. M. Hanink, A. Rodriguez-Alvarez, and B. M. Tabak

Copyright © 2013 John F. McDonald and Houston H. Stokes. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

The dynamic impacts of the federal funds rate and the foreclosure rate on the log of the S&P/Case-Shiller aggregate 10-city monthly housing price index are investigated using VMA modeling techniques in the period 2000(1)–2011(3). The findings are consistent with the view that the interest rate policy of the Federal Reserve in that period that kept rates artificially low contributed to the housing bubble. Positive shocks in the foreclosure rate are shown to be associated with declines in the change in the housing price index after a lag. In addition, negative shocks in the change in the housing price index are associated with a higher foreclosure rate. The results suggest that both the change in the housing price index and the foreclosure rate create a negative externality that is dynamic.