The implication of changes in income uncertainty and financial market development on U.S. mortgage market

During the time period 1980-2007 prior to the recent 2007-09 financial crisis, the U.S. has witnessed an expansionary pattern in the housing and mortgage market: (i) home ownership rate increased from 64.34% to 66.90%; (ii) house foreclosure rate increased from 1.31% to 2.71%; (iii) average mortgage loan-to-value ratio in the economy increased from 54.37% to 67.49%; (iv) average mortgage premium over risk-free rate decreased from 1.96% to 1.63%; (v) debt service ratio increased from 11.15% to 11.78%. This dissertation uses empirical data to identify key factors (changes in income volatility and financial market development) that contribute to this expansionary pattern, and develop a structural model to quantify the implications of these factors on U.S. housing and mortgage market.;The dissertation: (i) empirically documents significant increases in both permanent and transitory income volatility, using the Panel Study of Income Dynamics (PSID) 1970-2013 dataset; (ii) empirically documents both statistical and economic significance of the development of shadow banking system on commercial bank credit supply during 1993-2007, using the Call Report 1976-2007 dataset; (iii) develops an incomplete market life-cycle model to quantify the effects of changes in income volatility and financial market development on housing market, and find out only the changes in financial market development (increase in credit supply more specifically) could explain the expansionary pattern observed in the 1980-2007 U.S. housing and mortgage market, changes in income volatility (increase in income volatility to be more specific) would only yield counter-factual results.