It's a pretty Captain Obvious statement to say that market activity is comprised of individual human behavior, and that behavior is not always rationale. From an economic analysis and policy standpoint, it matters not that droves of people full of irrational exuberance were willing to bet it all on housing. It only matters what made those bets possible. In other words, what opened the flood gates, not why did people choose to run through them.

To that answer:

1. The Financial Modernization Act of 1999 and

2. The Commodities Futures Modernization Act of 2000, undid long-standing depression era safeguards and turned the banking industry into a casino (literally, the CFMA 2000 actually referenced state and federal gaming law).

These two bills of which no one is seriously talking about undoing worked together to create a system where the person and company who decided whether or not to make a loan could lay off the longterm risk on another party. That shirking of risk is what created your option ARMs, no down payment loans, and stated income loans which opened the floodgates to allow both fearful ("if I don't buy now I'll be priced out forever) and greedy (I'll leverage a 10% appreciating asset) buyers to run through.

And as for prices never coming down, the ratings agencies cooked up the AAA ratings necessary to get the big institutional money by assuming prices would appreciate at 10% forever. That's a doubling rate of every 7 years assumed by those with advanced business and math degrees working in executive level management of huge companies.

There is plenty of blame to go around. The financial institution, mortgage broker, real estate agent, and the appraiser all played their part. The financial institutions created these products and underwrite the files. They obviously did not perform their due diligence. They set the guidelines to sell on the secondary market. The broker can be blamed for steering and over charging these borrowers for the loan. There certainly were some real estate agents out there who told their prospective buyers to buy now before they are priced out. Oh, don't worry. In a year or two you can refinance and your property will be worth 20% more so don't worry. Then you have the real estate appraiser who inflated values so that the deal would fit for loan to value ratios and purchase price requirements by the lender. I am sure there are some exceptions and not everyone did this.

Low interest rates, easy credit, and a fake AAA rating on these loan products definitely played a role. Stated income and No Doc loans made it so anyone could a loan. Some of the subprime lenders even refinanced borrowers who were already 90 days delinquent. What happened was that many of these borrowers were already doomed to default and the time frame was pushed back as people were able to refinance before losing their home. Now, there are very few options. You also can't forget the Community Reinvestment Act which required all lenders to approve a certain number of loans for borrowers who were not credit worthy. Fannie and Freddie participated in that with their "expanded approvals". The real estate market will never see that again. Banks passed the risk on to the investor. If banks were required to hold the loans themselves in their portfolio, you would have to think the majority of those loans NEVER would have been approved in the first place. Since loans were easily available, prices went up.

It was caused by overindulgent, gluttonous greed. Pure and simple.

Time for a major diet.

There is much misinformation regarding the CRA. It did NOT apply to most subprime lenders as most subprime lenders were non-depositories. Additionally, it became law in 1977, housing blew up almost 30 years after the fact.

The Federal Reserve under Greenspan and Bernanke. Someone has to print the money and guaranty the income or debt. These guys thought they had tamed the business cycle and could manage expectations by just printing more money. All they were really doing was a "you always win because we have a printing press" business operation.

Jamie,

The real cause goes much deeper. Please consider reading this article, The National Homeownership Strategy.

http://theaffordablemortgagedepression.com/2010/03/11/origin-of-the-housing-bubble-the-national-homeownership-strategy.aspx

-Kevin (Bubblemore)

Kevin directs our attention to a blog by someone who is not an authority and who appears to have an axe to grind. That wouldn't be so much of a problem if the blogger in question actually supported any of the claims made with actual evidence. There's a lot of opinion out there, but I hope people will expect more than that in reaching their conclusions.

Mr. Dowlut/Sarah Palin remind me of the Bolsheviks in Dr. Zhivago.

Populists have been spouting the same virtues of class warfare forever through equivocal economic arguments. The results are always the same: find one problem and replace it with a bigger one.

So I'm just going to arbitrarily say "mortgage brokers" since simplistic rationale is en vogue.

In no particular order:
whites, blacks, rednecks, Jews, Mexicans, bankers, mortgage brokers, Wall Street, Main Street, the auto industry, Washington, BGE, the Baltimore Sun, Republicans, Democrats, Populists, Tea Partiers, Barack Obama, George Bush, me, you, construction industry, appraisers, economists, pension funds, hedge funds, blue-collar workers, FICO, people with bad credit, people with good credit, louts, hard workers, greedy people, generous people, religion, healthcare, China, banks, Sheila Dixon, Greenspan, casinos, alcohol, drugs, sex, booz, feminism, chauvinism, decorating, babies, etc... etc...

Here's the answer: whatever ideology I spout (due, most likely to my socioeconomic circumstances) is the culprit.

Looks like someone's on an afternoon bender.

"Little Debbie" you are right on the money. It is all the above who is at fault. For once, you give a clear, thoughtful, and lucid answer. Are you a mortgage broker? How do you know so much?

"Nutty Bar"

I'm glad that you could see my lucidity. I learned how to be a mortgage "banker" while studying for my GED.

Lots of education (GED), exposure to sophisticated finance as a mortgage "banker" and downright prescience means that my answers are invariably correct.

The Taxpayer Relief Act of 1997 (one of several, overlooked Clinton tax cuts) was a major cause of the residential real estate bubble. Prior to TRA97, homeowners had to carefully track their "basis" during the whole time they owned their home. Receipts were necessary for every home improvement. Upon home sale, the seller owed a capital gains tax on the sales price minus the adjusted basis of the home. The IRS and many others said this was an almost impossible compliance task for long-time homeowners. Then there was the complicated exception for retirees who could postpone their capital gains liability when moving after age 55.

TRA97 changed all that. A single homeowner would owe no tax on gain of $250,000 or less. A couple would owe no cap gains tax on gain of $500,000 or less. No documentation of basis is necessary. You just need to hold the home for two years and/or live in it for at least two out of five years. My boss' daughter married a guy whose full-time occupation was buying fixer-uppers and then selling them every two years -- he hope to net a million dollars after only 10 yrs of doing this. He certainly wasn't alone. The downside to this change was apparent after 2006 -- home sellers could no longer deduct capital losses on home sales!

In summary, TRA97 did more than anything to change one's home from a place to live for 30 years to an "investment" that could be flipped every two years.

The differential in interest rates between the most popular mortgages at the time, the 30-year FRM in 2000 (8.4%) and the 1-yr ARM in 2005 (4.5%), accounts for most of the increase in housing . With the reduction in interest rates, one could afford to pay 52% more for the same house while maintaining the payments constant.