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Systems 2015, 3(4), 378-398; doi:10.3390/systems3040378

An Examination of the Influence of Household Financial Decision Making on the US Housing Market Crisis

1
Economics, Connecticut College, 270 Mohegan Avenue, New London, CT 06320, USA
2
Social Sciences and Policy Studies, Worcester Polytechnic Institute, 100 Institute Road, Worcester, MA 01609, USA
3
Economics & International Relations, Connecticut College '15, New London, CT 06320, USA
*
Author to whom correspondence should be addressed.
Academic Editor: Nicos Komninos
Received: 15 July 2015 / Revised: 11 November 2015 / Accepted: 27 November 2015 / Published: 8 December 2015
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Abstract

This paper investigates the impact of what the extant literature has come to view as some of the major causes of the 2007 US housing market crisis. In particular we investigate the hypothesized effect of, lax financial regulations, the “savings glut” that is invested in the US from abroad, government support for increased home ownership, rising homeowners’ equity due to the real-estate boom, expansionary monetary policy, and bankruptcy reform. We examine how these hypothesized causes, working through household and institutional level decision-making, based on information availability and incentives, influenced the outcomes in the market for homes. Using a system dynamics model of household finance, we overlay the hypothesized causes chronologically to extrapolate their real-world simultaneous impact and test the hypothesis that they could have together led to the crisis, by simulating and checking against observed data. We find that with the exception of lax financial regulations, each cause by itself provides only a partial explanation of the crisis. Interestingly, the controversial expansionary monetary policy of the Federal Reserve, blamed by some for fueling the crisis, actually prevents the housing market boom from becoming too large. However on the downside, it discourages household savings and causes the fall in home prices to be deeper, due to weak household finances that result from low savings. We confront our model’s assumptions and outcomes with US economic data. We find our model assumptions are justified and simulation results are strongly supported by the data. View Full-Text
Keywords: household financial decisions; US Housing Crisis; G02; C61 household financial decisions; US Housing Crisis; G02; C61
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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. (CC BY 4.0).

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MDPI and ACS Style

Mukerji, P.; Saeed, K.; Tan, N. An Examination of the Influence of Household Financial Decision Making on the US Housing Market Crisis. Systems 2015, 3, 378-398.

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