The dramatic expansion in subprime mortgage credit fueled a remarkable boom and bust in the US housing market and created a global financial crisis. Even though considerable research examines the housing and mortgage markets during the previous decade, how the expansion in mortgage credit affected the rental market remains unclear; and yet, over 30percent of all U.S. households reside in the rental market. Our study fills this gap by showing how the multifamily rental market was adversely affected by the development of subprime lending in the single-family market before the advent of the 2007/2008 subprime-induced financial crisis. We provide evidence for a fundamentals-based linkage by which the effect of an innovation in one market (i.e. the growth in subprime mortgage originations)is propagated through to another market. Using a large database of residential rental lease payment records, our results confirm that the expansion in subprime lending corresponds with an overall decline in the quality of rental payments. Finally, we present evidence showing that the financial performance of multifamily rental properties reflected the increase in rental lease defaults.

The United States of America experienced a remarkable housing boom and bust during the previous decade that spawned a global financial crisis in 2007 and 2008. Due to the profound, lasting and wide-ranging effects of this crisis, economists have focused considerable attention on the crisis’ causes and their possible spillovers to other sectors. As a result, many theories exist that attempt to explain the growth in homeownership and mortgage credit. For example, Glaeser (2010) ties the seeds of the housing boom and bust to policies that created direct and indirect subsidies designed to promote homeownership. Other studies have suggested that the housing boom resulted from interest rate policies that were pursued by the Federal Reserve in an effort to stimulate the economy following the dot-com recession in 2001 as well as from foreign capital being invested in U.S. mortgage-backed securities.1The majority of research on the causes and consequences of the housing and financial crisis focuses attention on the relation between homeownership policies and mortgage markets. Thus, even though considerable research examines the housing and mortgage markets during the previous decade, how the expansion in mortgage credit affected the rental market remains unclear; and yet, over 30 percent of all U.S. households reside in the rental market.2Ourstudy fills this gap by showing how the residential rental market was adversely affected by the development of subprime lending long before the advent of the 2007/2008 subprime induced financial crisis.