The purpose of this paper is to investigate linkages between households’ expectations and credit markets in the housing crisis.
In the Markov-switching framework, the sample period is classified into high- and low-impact regimes based on impacts of expectations on default rates, and the good-time-to-buy (GTTB) index is chosen to proxy for expectations toward the housing-market dynamics.
The results suggest that in high-impact regimes, optimistic expectations are substantially associated with lower defaults for all default rates analyzed, and second mortgage defaults are more sensitive to households’ expectations than first mortgage defaults. In low-impact regimes, the GTTB index significantly influences composite and first-mortgage default rates, but its impact is insignificant for second mortgage and bankcard default rates.
The results provide compelling evidence that households’ expectations play more important roles in credit markets in turmoil periods.
