"But our estimates suggest that foreclosures lead to more abrupt declines in these outcomes than would be observed in the absence of foreclosures, and these declines are likely to be more painful in the midst of a severe recession. This is consistent with the amplification mechanisms emphasised in Kiyotaki and Moore (1997) and Krishnamurthy (2003). We believe that these results demonstrate a direct connection between a financial friction – forced sales induced by foreclosures – and a reduction in residential investment and durable consumption during and after the recession of 2007 to 2009.
Our estimates of the effect of foreclosures on residential investment and auto sales can partially explain both the magnitude and length of the recession of 2007 to 2009. For example, the sharp rise in foreclosures began relatively late in the recession and continues into 2010. If we combine this fact with the finding in Leamer (2007) that residential investment is among the most powerful components leading the US out of recession, it is possible to argue that foreclosures have likely contributed to the length of the recession and sluggishness of the recovery. Similar arguments apply to our findings on auto sales.
Leamer (2007) identifies durables as the part of consumer spending with the strongest negative affect on economic growth during recessions . Under the assumption that our results on auto sales extend to the entire durable goods share of the economy (23.6 % of GDP in 2008), foreclosures can explain the relatively sluggish growth in durables well into 2010. Given that the 2007 to 2009 recession and its aftermath have been closely related to depressed levels of durable consumption and residential investment, our results thus highlight an important role for foreclosures and house prices in understanding weakness in the economy..."
at http://www.voxeu.org/index.php?q=node/6091
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