Just wanted to give a short blog about how the housing bubble came to be. I got the information from my assigned book After the Music Stopped by Alan S. Blinder.
First, I wanted to say that this book is amazing, because it explains how the 2008 Great Recession came to be in very simple terms. If you have the time and the motivation I would highly recommend you read this book!
Alan lists 5 reasons on how the housing bubble formed and ultimately burst in 2008.
- Reason 1 for the bubble was the ability to earn a high real rate of return through investing in housing, even with average house pricing increases.
- Reason 2, Alan believes that after the stock bubble burst in 2000 and after the stock market crash in same year, Americans wanted a safer place to invest money. This safer market took form in housing investment, which rose considerably in 2002 and continued to do so for the next six years.
- Reason 3, fundamentals of housing like income growth and interest rates were from 2003 to 2006.
- Reason 4, banks were practically throwing money at buyers/owners of homes, which only encouraged them to “lever up.” Basically, banks encouraged risky investments.
- Reason 5, people could turn their houses into ATMs, so to speak. They could do this by refinancing their mortgages into much larger ones with a lower interest rate.
Lastly, Alan defined a bubble as the price of a good far exceeds its real value. Eventually that inflated value would increase to the point where it would burst. As Someone who had no idea what a bubble was, this book was an excellent tool in explaining the bubble.