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Central banks around the world use monetary policy tools to promote economic growth and stability; for example, in the United States, the Federal Reserve (Fed) uses federal funds rate adjustments, quantitative easing (QE) or tightening, forward guidance, and other tools “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Changes in monetary policy affect both businesses and consumers. For consumers, changes in monetary policy affect bank credit supply, refinancing activity, and home purchases, which in turn affect household consumption and thus economic growth and price stability. The U.S. Fed rate cuts and QE programs during COVID-19 led to historically low interest rates, which spurred a huge wave of refinancings. However, the pass-through of rate savings in the mortgage market declined during the pandemic. The weaker pass-through can be linked to the extraordinary growth of shadow bank mortgage lenders during the COVID-19 pandemic: Shadow bank mortgage lenders charged mortgage borrowers higher rates and fees; therefore, a higher market share of them means a smaller overall pass-through of rate savings to mortgage borrowers. It is important to note that these shadow banks did provide convenience to consumers, and they originated loans faster than banks. The convenience and speed could be valuable to borrowers and important in transmitting monetary policy in a timelier way, especially during a crisis.

The global financial crisis of 2007–2009 helped usher in a stronger consensus about the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. The latest research regards the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000s experience in the United States, and perspectives from around the globe. Even with the significant degree of heterogeneity in legal environments, institutions, and economic fundamentals over time and across countries, several common themes emerge. Research indicates that fundamentals such as productivity, income, and demographics play an important role in generating sustained movements in house prices. While these forces can also contribute to boom-bust episodes, periods of large house price swings often reflect an evolving housing premium caused by financial innovation and shifts in expectations, which are in turn amplified by changes to the liquidity of homes. Regarding credit, the latest evidence indicates that expansions in lending to marginal borrowers via the subprime market may not be entirely to blame for the run-up in mortgage debt and prices that preceded the 2007–2009 financial crisis. Instead, the expansion in credit manifested by lower mortgage rates was broad-based and caused borrowers across a wide range of incomes and credit scores to dramatically increase their mortgage debt. To whatever extent changing beliefs about future housing appreciation may have contributed to higher realized house price growth in the 2000s, it appears that neither borrowers nor lenders anticipated the subsequent collapse in house prices. However, expectations about future credit conditions—including the prospect of rising interest rates—may have contributed to the downturn. For macroeconomists and those otherwise interested in the broader economic implications of the housing market, a growing body of evidence combining micro data and structural modeling finds that large swings in house prices can produce large disruptions to consumption, the labor market, and output. Central to this transmission is the composition of household balance sheets—not just the amount of net worth, but also how that net worth is allocated between short term liquid assets, illiquid housing wealth, and long-term defaultable mortgage debt. By shaping the incentive to default, foreclosure laws have a profound ex-ante effect on the supply of credit as well as on the ex-post economic response to large shocks that affect households’ degree of financial distress. On the policy front, research finds mixed results for some of the crisis-related interventions implemented in the U.S. while providing guidance for future measures should another housing bust of similar or greater magnitude reoccur. Lessons are also provided for the development of macroprudential policy aimed at preventing such a future crisis without unduly constraining economic performance in good times.