Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn

This paper quantifies the impact of declining home prices, increasing mortgage credit losses, and the associated reduction in credit supply on real GDP growth. Using a state-level panel analysis, I first estimate the link between home prices and foreclosures. I estimate that an additional 15 percent home price decline from mid-2008 levels would be consistent with total residential mortgage credit losses over 2007–12 of $750 billion, although the uncertainty is high. I then gauge the impact of such losses on the supply of credit from banks, asset-backed security markets, and the government-sponsored enterprises, and in turn on real GDP growth. In the central scenario, the crisis could lower real GDP growth in 2008 and 2009 by an average of 2.6 percentage points per year. This estimate excludes both adverse multiplier effects (labor market deterioration, global trade repercussions, and credit quality feedback) and policy offsets.