2What Happened?
THE PRIMARY CAUSE OF THE GREAT RECESSION WAS A MASSIVE MIS investment in residential real estate. We built too many houses, too large houses, and houses in the wrong places. The overinvestment in residential real estate was more than $3 trillion (and possibly as much as $8 trillion, based on the decline that has occurred since the bubble burst).1
Underlying this massive misallocation of capital to residential real estate was a belief that home prices appreciate forever and that housing is a great investment. This false belief was based on a long-term trend of home appreciation that was driven by a long history of government policies supporting investment in the housing market, which we discuss in future chapters.
In economic ...
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