During the 1999-2019 U.S. housing cycle, three empirical facts present a puzzle: in the boom period, the correlation between income growth and mortgage growth is (1) negative across ZIP codes within a metropolitan area, but (2) positive across metropolitan areas, and (3) the metropolitan areas that experience the worst bust also show the strongest recovery. I develop a unified credit expansion theory that explains both within- and cross-metro patterns in the prior, boom, bust, and recovery periods (including the three facts above) and generates new testable implications of “double differences" (cross ZIP codes and cross metros) for the four periods. Following the idea of “Economic Base Theory", I construct local economic exposure to net export growth as the driving force of local economy and credit expansion. For the identification strategy, I use a new instrumental variable approach from the International trade literature for the following empirical results. First, I show that high-net-export-growth metros experience a stronger boom-bust-recovery housing cycle due to credit expansion in private-label (non-jumbo) mortgages (PLNJMs), rather than in government-sponsored enterprise mortgages (GSEMs), because only the former can legally respond to local economic conditions. Second, for the “double differences", I define a low-minus-high (LMH) factor as the private-label (non-jumbo) mortgage (and house price) growth in low-income ZIP codes minus that in high-income ZIP codes within the same metropolitan area. I show that this low-minus-high factor in the high-net-export-growth metros is more positive during the boom period, more negative during the bust period, and slightly more positive in the recovery period than in the low-net-export-growth metros. Lastly, I employ five tests to demonstrate that “speculation" is unlikely to play a dominant role in this housing cycle.
Presentation: ASU PhD Seminar, ASU Browbag, 2024 Eastern Finance Association, Georgia Institute of Technology, 2024 Econ Graduate Students' Conference at WashU, 2025 Financial Management Association Annual Conference, and 2025 Southern Finance Association Annual Conference.
