The Macro-Political Economy of the Housing Market Through an Agent-Based Model

Abstract

Both, the housing bubble and financial crisis, are prime examples of complex events. Complex in the sense that there were several interconnected and interdependent root causes. This paper presents an agent-based model (ABM) to model the housing market from 1986 to 2017. We provide a unique approach to simulating the financial market along with analyzing the phenomenon of emergence resulting from the interactions among consumers, banks and the Federal Reserve. This paper specifically focuses on the emergence of “underwater mortgages” and the macroeconomics of the housing market. The market value of a property is heavily influence by the value of a neighboring property; therefore, individuals are able to gauge the probable value of a property that has not been developed yet. The blend of available financial products to consumers (i.e., ARM versus Fixed-Rate) certainly influences demand within the housing market given that ARM products are more affordable than fixed-rate products. Policymakers and financial institutions should work together to develop programs, which monitor the supply of these historically easy to access financial products and prevent the risk of underwater mortgages and crashes.