Sunday, September 28, 2008

Housing Bubble Explained

Mark Thornton on the Housing Bubble

1. The Federal Reserve cut interest rates to as low as 1% so that after inflation we had negative interest rates.

2. As a result, mortgage rates fell to an all time low.

3. Low rates caused borrowing and lending to explode, particularly in real estate. For example, commercial banks more than doubled the amount of real-estate loans they made.

4. All these low interest loans had to be extended to people with worse credit ratings and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed.

click for the graphs

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