8:46 AM » Understanding Context: The Housing Boom & Bust
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Over at , Harvard economics professor Ed Glaeser looks at the ultra-low interest rates of the aughts, and does not find them to be much to blame for the US Housing boom and bust. Professor Glaeser unfortunately overlooks many of the causal and exacerbating factors of the housing boom and bust. Let us go over some of these factors for the benefit of those who may somehow have missed them. I have in the past, but given the prof’s 30 year chart, why don’t we walk him through the entire context of what took place historically. (Note: this is exhaustively detailed in ) 1. A medium Housing boom and bust began in 1989, following the Fed’s rate reaction to the ‘87 crash. Nationally, residential RE did not get back to break even until about 1996-97 (it varied by region). 2. The mid-1990s also saw the build out of numerous industries: Mobile, Software, Semi-Conductors, Internet, Storage, Telecom, Networks, etc. Huge amounts of wealth was created: Employment was running near capacity, wage gains were substantial, and employee stock options did extremely well. 3. Stock markets had been making enormous gains. As someone who worked on Wall Street then, I witnessed first hand investors taking partial cash outs of huge equity gains and rotating them into Real Estate. This included major upgrades to primary residences, and purchases of vacation/investment properties. 4. Then came Enron, WorldCom, Tyco, the dot com crash, analyst banking scandal, etc. The Equity party appeared to be over. 5. Starting in January 2001, the FOMC began lowering rates, eventually to 1%. Rates were below 2% for 36 months, and at 1% for over a year. This was unprecedented . 6. Homes are a leveraged credit purchase , and lowering the cost of that credit has an inverse effect on prices — i.e., cheaper mortgages = more expensive houses . People budget monthly, and those carrying costs are more important than actual purchase prices. An outsized drop in interest rates can cause a spike in home prices, with monthly...