Redlining in the US Housing Market and the Early Stage of the Housing Bubble

Project Start:03/2014
Researchers:Vahid Saadi, Vahid Saadi
Category: Financial Intermediation
Funded by:LOEWE

The research project contributes to the discussion on the role of Community Reinvestment Act (CRA) in the subprime boom of early 2000s, housing bubble and finally the financial crisis. The focus is on whether the CRA had an economically significant role in the unprecedented house price growth rates of that period.

The CRA was revised by the US congress in 1995 with the aim of greater enforcement on banks to provide loans in low- and moderate-income neighborhoods or risk regulatory intervention. Considering the purpose of the CRA, one would ideally like to see whether the lending standards differ significantly for CRA eligible neighborhoods or not, and furthermore, whether house prices evolve differently in such regions. The project has documented significant cross sectional differences among house price growth rates in different zip codes and/or counties. Then, CRA-eligible neighborhoods are identified and the house price evolution in these regions is compared with a set of comparable regions. The team makes use of the income distribution in these regions to distinguish between those eligible regions for which CRA regulations were easier to enforce and compare them to other eligible regions for which CRA was not easy to be enforced. The results show that mortgage supply and house price growth in CRA eligible areas was significantly higher than in matched non-CRA eligible areas. This outward shift in supply can explain the bulk of the increase in house prices.


Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
155Vahid SaadiMortgage Supply and the US Housing Boom: The Role of the Community Reinvestment Act2016 Financial Intermediation The Community Reinvestment Act, Mortgage supply, House prices, Homeownership