Good morning!

I am afraid you left the Government out of the picture.

Prices of housing soared for 2 reasons in addition to the ones you mention.
1) Greenspan and Bernake were told to keep the interest rates artificially low so that low income families would be encouraged to buy homes. Of course, higher income families were encouraged to buy more luxurious homes, too.
2)The government FORCED banks to make shaky loans (including interest only ARMs, etc) to low income families (and others) – often without even asking if the borrower had an income!

In addition, Treasury was required to keep the presses rolling to assure cash liquidity. Funding two wars was a convenient “cover” for printing money.

For some reason (my suspicion is that it was political) Bernake suddenly decided that housing prices were getting too high (DUH!), so he began hiking interest rates rapidly. Unless he is totally stupid with only a third grade education (but we know he is intelligent and well educated), he KNEW that his actions would cause a real estate market CRASH! That was his objective! First, the low income families (as well as others who were mortgaged to the hilt) with interest only ARMs, where the payments were the maximum they could afford, would be unable to make the higher payments and would default. This put large numbers of properties on the market, increasing supply beyond demand. Speculators panicked, selling below market, just to get out. This suppressed the market even further and caused a snowball effect – no, an avalanche effect in this case, of falling prices.

When Bernake saw that the crash was in full swing, he brought interest rates down rapidly to record lows, KNOWING that would have no effect! Once the avalanche is in progress, you can’t stop it with a tennis racquet! That is like trying to stop a Rhino from charging with a fly swatter! AND BERNAKE KNEW IT! He had the market crash he wanted and he knew that lowering interest rates so late in the tumble would have no effect.

The major players in creating the housing bubble aside from greedy (ignorant) buyers were Bernake, Paulson, and Congressmen Chris Dodd (D) and Barney Franks (D).

One could argue that these men were just following government guidelines to help the low income families buy homes (first time buyer programs, etc.) One could postulate that Bernake was simply trying to keep inflation in check and slow the rate at which housing prices were rising… One COULD argue these points, but the facts are engraved in History! Rapidly rising interest rates burst the housing bubble and we are now living in the rubble!

Rising building costs helped boost prices, but were only a minor cause.


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