Beyond Leveraged Losses:The Balance Sheet Effects of the Home Price Downturn
Jan Hatzius*This Draft: September 10, 2008
Abstract
This paper aims to quantify the impact of the decline in US homeprices, the increase in mortgage credit losses, and the associatedreduction in credit supply on real GDP growth. Using a state-levelpanel analysis, we first estimate the link between home prices andforeclosures. We estimate that an additional 10% home pricedecline from mid-2008 levels would be consistent with totalresidential mortgage credit losses over the years 2007-2012 of $636billion, although the uncertainty is high. We then try to gauge theimpact of the credit losses on the supply of credit from banks, asset-backed security markets, and the government-sponsored enterprises(GSEs), and the knock-on effect on real GDP growth. In our centralscenario, we estimate that the crisis could lower real GDP growth in2008 and 2009 by an average of 1.8 percentage points per year.This assumes that the GSEs continue to expand their mortgage book of business aggressively, an outcome that has become more likelyfollowing the measures announced by the U.S. Treasury onSeptember 7, 2008. If instead the GSEs stopped expanding, theestimated GDP hit would rise to 3.2 points per year.* Goldman, Sachs & Co (e-mail: jan.hatzius@gs.com). I am grateful to CharlieHimmelberg, Don Kohn, Nellie Liang, Ed McKelvey, Jim O’Neill, Larry Summers,Andrew Tilton, and Dominic Wilson for helpful comments. Thanks are also due toSeamus Smyth for help with the models, and to Kent Michels and Shirla Sum foroutstanding research assistance. The views expressed in this paper are solely those of theauthor and not necessarily those of Goldman Sachs. All errors are my own.
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