This paper uses the EGARCH model to investigate the volatility spillovers between home foreclosures, adjustable mortgage rates, housing prices and unemployment rate for the US. The results provide evidence of volatility spillover effects from adjustable mortgage rates, home foreclosures and unemployment rate to housing prices. The results further indicate the presence of volatility spillover effects from housing prices to home foreclosures. However, unemployment rate is affected only by volatility spillover from adjustable mortgage rates. These results imply that to mitigate the problem of volatility in housing market, the policy maker should coordinate adjustable mortgage rates, housing prices and home foreclosures. In other words, the authorities cannot effectively use foreclosure strategies to influence the housing market without considering adjustable mortgage rates, housing prices and unemployment rate.

The mortgage crisis in the US which started in 2007 has been blamed on excess of subprime mortgage loans, low mortgage rates, inflow of foreign capital into mortgage-backed securities, relaxed credit standards, greed, lenders’ disregard for risk management, lack of regulatory oversight, and inflated housing prices. Between 2003 and 2004, mortgage rates reached historic lows and house prices skyrocketed. The mortgage crisis, coupled with massive household debts, high loan-to-value ratios caused the economy to slip into a deep recession. The subprime debacle led to severe liquidity crisis as a result of deterioration in the balance sheets of most lending institutions. As a result of the subprime crisis, most financial institutions tightened their credit standards. Household financial crisis, high unemployment rate and long duration of unemployment all contributed to an increase in the supply of existing houses in the market. Consequently, house prices fell despite low mortgage rates and loan modification programs introduced by the federal government. To restore stability in the real estate market, the federal government bailed out some of the troubled-institutions through the Troubled Asset Relief Program (TARP).

The subprime crisis has attracted the attention of economists and analysts given its implications for the US economy. Most of the studies have concentrated on either the impact of foreclosures on property values or on the relationship between foreclosures and crimes. The present study, however uses the EGARCH model developed by Nelson (1991) to examine the asymmetric relationships between foreclosures, housing prices, unemployment rate and adjustable mortgage rates.

Applied Economics Journal, Asymmetric, Volatility, Troubled Asset Relief Program (TARP), foreclosures (FCL), adjustable rate of mortgage (ARM), housing prices (HPI), unemployment rate (UPR), Transmission, Foreclosures, Housing Prices, Unemployment Rate, Adjustable Mortgage Rates.