(E3 ) Working Papers Series
E3 Working Paper WP-034 Abstract
WP-034: Steven Sexton, JunJie Wu and David Zilberman, "How High Gas Prices Triggered the Housing Crisis: Theory and Empirical Evidence" (February 2012) Full Paper
The U.S. housing collapse in 2007 is widely blamed for inducing a financial crisis that spread to the real economy and caused a severe and prolonged downturn. This paper investigates the role of rising gas prices and a dramatic gas price shock in triggering the housing market collapse. Specifically, we develop a parsimonious model of housing demand that integrates the Alonso-Muth model of urban form and the Poterba model of housing investment in order to demonstrate that unanticipated increases in gas prices increased the cost of work commutes, lowering the value of homes away from the city center and increasing foreclosure rates.