Residential properties.


As it is known, the interest rates in the US declined dramatically between the years 1996 and 2006. Glaeser et al. (2010) attribute this to hot money and global savings. At the same time, the price index as given by the Federal Housing Finance Agency increased by 53%. According to Taylor (2009), these low real estate interest rates propagated the drastic demand surge for property because financing for real estate became cheap and also attractive.

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As delinquency and rates of foreclosure on sub-prime mortgages came down, the price of real estate enhanced real estate market demand (Taylor, 2007). With low interest rates, even those with undesirable credit history would cheaply access mortgage loans regardless of their suitability. This occurs in the belief that it could be compensated with the rapidly increasing home prices. There was an irrational enthusiasm that hyped up the housing market and caused the standards for mortgage to be compromised. Therefore, it is the low interest rates that led to the US real estate market boom which only lasted until 2007.

The sub-prime crisis together with the general economic crisis faced could be largely attributed to the housing bubble. The anticipation for increasing prices of real estate led to an environment where financial institutions and lenders loosened their standards thus risking default.

Just as the continued increase in housing prices was reinforced by increasing housing prices so was the continued dip in housing prices reinforced by the falling housing prices. This housing boom of the 2000s made sub-prime lenders appreciate the faster appreciation of lowly priced homes than the highly priced homes. After the year 2007, as the prices dipped, low-price homes had their prices dip faster. 

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