The Regime Shift Associated with the 2004-2008 US Housing Market Bubble

• Published in: PloS one Vol. 11; no. 9; p. e0162140
• Main Authors: Tan, James, Cheong, Siew Ann
• Format: Journal Article
• Language: English
• Published: United States Public Library of Science 01.09.2016; Public Library of Science (PLoS)
• Subjects: Analysis; Earth Sciences; Eigenvalues; Engineering and Technology; Financial crises; Financial markets; Forecasts and trends; History, 21st Century; Homeowners; Housing; Markets; Median; Phase transitions; Physical Sciences; Prices and rates; Research and Analysis Methods; Skewness; Social Sciences; Stability; United States; Variables; United States; United States > US; Singapore
• ISSN: 1932-6203; 1932-6203
• DOI: 10.1371/journal.pone.0162140

The Subprime Bubble preceding the Subprime Crisis of 2008 was fueled by risky lending practices, manifesting in the form of a large abrupt increase in the proportion of subprime mortgages issued in the US. This event also coincided with critical slowing down signals associated with instability, which served as evidence of a regime shift or phase transition in the US housing market. Here, we show that the US housing market underwent a regime shift between alternate stable states consistent with the observed critical slowing down signals. We modeled this regime shift on a universal transition path and validated the model by estimating when the bubble burst. Additionally, this model reveals loose monetary policy to be a plausible cause of the phase transition, implying that the bubble might have been deflatable by a timely tightening of monetary policy.