Credit Supply and Housing Prices in National and Local Markets

The phenomenon of "irrational exuberance'' around housing prices is nowwell established as a driving force of housing bubbles. However, the roles of credit supply and themispricing of credit are less well understood. This article, discusses the recent literature on the relationship between credit supply and housing prices in national and local markets, with a view to identifying gaps in understanding this relationship as well as the implications of these gaps for the ability ofmarket participants and regulators to detect systemic risk. This article connects the literature to the articles in this special issue, which emphasizes the importance of understanding local market conditions, including ways in which housing finance affects and is in turn affected by local markets.