Eight Policy Lessons from the US Housing Meltdown

The global financial crisis has generated many lessons for policy makers in the housing sphere, as well as in financial regulation. This paper discusses eight lessons drawn specifically from the United States housing meltdown that triggered the crisis. The housing sector is important for monetary policy and financial stability, highly interconnected with the financial system, and dependent on institutional details that vary widely across countries and through time. Easier and cheaper access to finance does not improve long-run housing affordability; but if credit conditions ease too much and the credit assessment process breaks down, strategic default becomes more likely. That defaults rose so far in the US shows how unusual its housing system is—a fact not revealed in simple aggregate statistics. One element of the US exceptionalism is that housing supply is quite flexible there, and that helped produce the bust.