Describing on a paper by Oscar Jorda and others, John Hamilton writes,
This “hockey stick” in mortgage lending was accompanied by a similar pattern in real house prices. These too had been largely stable for nearly a century. Since 1950, house prices have grown faster than inflation around the world.
My guess is that as of 1950, when the rise in mortgage credit began, there was too little mortgage borrowing. My guess is that since about 2000, there has been too much mortgage borrowing. In Minsky terms, we went from hedge finance in 1950 to speculative finance in the 1990s to Ponzi finance thereafter. Ponzi finance means that people get loans who cannot repay them except by getting new loans.
Certainly true with the liars loans, 120% mortgages and exploding ARMs of a few years ago.
Steve
Is there a theory that suggests houses, college, healthcare, etc. we’re underpriced before new finance mechanisms coincided with dramatic price increases?
There is a huge dynamic of saving thru house equity that results in most voters having most of their wealth as equity in their house — for most American home owners, they have more house equity than the sum of their financial savings.
These folk like the house price increases based on easy home buying mortgages.
For the majority in any high-priced area, even if it is due to high zoning regulations, any changes that are likely to reduce current values or even expected increases in values, such changes will be opposed. Rationally.