Chapter 35

Credit, the Carry Trade, Tax Rates, and the Residential Real Estate Market: A Retrospective


The financial innovations in the credit markets, the tax treatment of residential real estate, and the Fed’s monetary policy combined to create a perfect storm in the real estate market. During the early part of the cycle, these three factors fueled a virtuous cycle that led to rising home prices, a boom in real estate, and an increase in leverage in the US economy. The rising net worth also stimulated aggregate spending on consumer goods. The economy prospered and grew. The rising real estate prices attracted new entrants, construction activity increased, and the supply of real estate increased. Over time, the increased supply reduced ...

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