In an earlier post, How Sub-Prime Lending Created the Housing Bubble, I gave a brief description of the impact of adding a large number of new buyers to the market. However, the title is somewhat misleading because it does not fully explain how the bubble was inflated. In this post, I hope to provide a more detailed explanation of what factors and conditions combined to drive prices so high. The Great Real Estate Bubble was caused by 4 interrelated factors:
- Separation of origination, servicing, and portfolio holding in the lending industry.
- Innovation in structured finance and the expansion of the secondary mortgage market.
- The lowering of lending standards and the growth of subprime lending.
- Lower FED funds rates as a catalyst (Lowering mortgage rates was not a big factor.)
- The negative amortization loan (Option ARM.)