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Housing Bust and the Economy

Written By: Jason Shafrin - Aug• 08•08

EconBrowser discusses a paper by Claessens, Kose and Terrones, entitled “What Happens During Recessions, Crunches and Busts?”  The authors look at what happens historically to important macroeconomic variables when there is either a recessions, a credit contraction, an episode of house price declines, and/or an episode of equity price declines.  The authors find the following:

Our results indicate that interactions between macroeconomic and financial variables can play major roles in determining the severity and duration of a recession.  In particular, we show that recessions associated with credit crunches and house price busts are deeper and last longer than other recessions are….If these statistics, based on a large number of episodes, provide any guidance, they suggest that the adjustments of credit and housing markets in the United States are only in the early stages relative to historical norms and might still take a long time

The authors found that episodes of credit contractions and housing price declines lasted lasted 6 and 8 quarters respectively during a typical downturn; for a credit “crunch” or a housing “bust” these downturns in the economy lasted 10 and 18 quarters respectively.

The U.S. Economy may not be out of the water yet.

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