A previous version of this working paper was originally published in 2011. Supersedes Working Paper 11-26 — A Quantitative Analysis of the U.S. Housing and Mortgage Markets and the Foreclosure Crisis.

The authors stress the role of favorable tax treatment of housing in matching these facts. They then use the model to account for the foreclosure crisis in terms of three shocks: overbuilding, financial frictions, and foreclosure delays. The financial friction shock accounts for much of the decline in house prices, while the foreclosure delays account for most of the rise in foreclosures. The scale of the foreclosure crisis might have been smaller if mortgage interest payments were not tax deductible. Temporarily higher inflation might have lowered the foreclosure rate as well.