The connection: dot-com crash and housing boom
By Bradley Inman, Thursday, March 8, 2007.Subprime tsunami threatens to extend housing downturn
Inman News writer Matt Carter filed his in-depth four-part series on the crisis in subprime mortgage lending today. Part one looks at how economic events like the dot-com stock market bust and the flow of global investment capital helped ease access to credit, fueling a housing boom.
He offers a fascinating historical overview. Here is a taste:
Some economists believe that the housing boom was precipitated, at least in part, by the drastic fall in interest rates following the dot-com stock market crash. After tech stocks collapsed in 2000, the Federal Reserve attempted to stimulate the economy by slashing short-term interest rates to encourage borrowing. The Fed rolled back the short-term federal funds rate from 6.5 percent in May 2000 to 1 percent in June 2003. Long-term rates followed suit, falling from about 8.5 percent to 5 percent during the same period.
A corresponding dip in mortgage rates gave people shopping for homes more buying power, sparking a wave of home purchases that helped start home prices on an upward climb.
The all-time record for U.S. mortgage originations was set in 2003, with nearly $4 trillion in new loans made. From 2001 to 2005, housing prices spiraled upward at a rate of 9 percent per year nationwide, with double-digit appreciation in most areas outside of the Midwest.
The U.S. economy dodged a major recession, even when the dot-com stock market collapse was followed by the Sept. 11, 2001, terrorist attacks. But the drop in long-term interest rates also left investors in U.S. Treasuries looking for similar securities that delivered a better return.
Some turned to mortgage-backed securities -- packages of home loans bundled for sale on Wall Street -- providing liquidity to "private-label" lenders that compete with the government-sponsored enterprises Fannie Mae and Freddie Mac.
All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.
You must login or register to post a comment.