It didn’t crash because they unleashed the toxic mortgages when things started to slow down as a result of the recession.
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Residential Fixed Investment (RFI):
“Residential Construction
Real RFI typically turns down about 11 months
before the business cycle peak, as rising interest
rates (Figure 2) slow the pace of housing starts and
new home sales. In similar fashion, the growth of
real RFI was weakening significantly prior to the
2001 recession. Hence, one potential cause of the
2001 recession may have been a shock to the resi-
dential housing sector. Table 4 shows that forecasters
generally were surprised by the magnitude of the
decline in housing construction in 2000. By the
fourth quarter of 2000, the cumulative forecast error
for real RFI was a little more than 4 percentage
points.
The unexpected decline in housing investment
prior to the March 2001 business cycle peak may
have resulted from rising interest rates. Conventional
mortgage interest rates rose from about 6.75 percent
in December 1998 to about 8.5 percent in April 2000;
over the same period, the 12-month percent change
in the core PCE chain-type price index rose only
from 1.6 percent to 1.9 percent. The rise in nominal
and real interest rates corresponded with a more
restrictive monetary policy: From June 1999 to May
2000, the FOMC increased its intended federal funds
target from 4.75 percent to 6.50 percent.
17”
