Real Estate Roller Coaster
The Housing Bubble in 4 Easy Steps, from the Mises Institute:
1. Cut Fed Funds rate from 6.5% in 2000 to 1% by 2003.
2. 30-year mortgage rates fall to all-time low by June 2003.
3. Because of low interest rates, mortgage loans double between 2001 and 2006.
4. All these low-interest loans had to be extended to people with weak credit ratings and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed. Click on the arrow below to the Real Estate Roller Coaster:
Fannie Mae, Freddie Mac, mortgage-backed securities, and credit derivatives were simply the conduit that made all these bad loans and investments seem less risky than they really were. In this manner the Federal Reserve can fool the market, at least temporarily. In the end the market always reasserts itself.