Chapter 8. The Backwards, Rate-Driven Economy


There are some frauds so well conducted that it would be stupidity not to be deceived by them.

 --Charles Caleb Colton (Lacon, 1825)

In the mid-2000s, news of the housing boom and bust was omnipresent. There was no one in the United States unaware of the huge run-up in home prices during 2002–2006, or of the subsequent bust that followed.

What most people did not realize, however, was just how disproportionate the role the so-called real estate–industrial complex played during the 2002–2007 economic cycle. Few investors at the time were aware of the impact the housing boom had—not just for the real estate market, but for the stock market as well. Even today, most people do not really comprehend the full impact the real estate market had on the rest of the economy.

In order to understand how the United States ended up a Bailout Nation, it is crucial to put the extraordinary surge of housing into broader context.

In most business cycles, it is the economy that drives real estate. Job creation and wage growth are the key drivers of home purchases. Buyers save for a down payment, get approved for a mortgage, and then go shopping to buy a home. While interest rates are an important factor, in the typical cycle it's the economy that matters most.

But that's not how it happened this time.

The 2002–2007 housing cycle was historically unique. The combination of ultralow rates, new types of exotic mortgages, changes in lending standards, and massive ...

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