The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy's Only Hope

7The Residential Real-Estate-Market Bubble and Financial-Market Stress

 

AS WE HAVE DISCUSSED, THE “BURSTING” OF THE BUBBLE (MISIN-Vestment) in the residential real estate markets led to the deterioration of the capital markets and to the Great Recession. In reality, it was the actions that led to the misinvestment (bubble) in the first place that were destructive. The bursting of the bubble was both inevitable and healthy for the economy in the long term. The bursting stopped the misinvestment process. It was the misinvestment, not the correction, that reduced our future standard of living.

Let’s examine the economics of the residential real estate market. In the long term, the prices of residential real estate are driven by the cost of building ...