“Also like to mention that the KEY factor that drove the boom was buyer *PSYCHOLOGY*. The belief that buying a home was the key to wealth, that homes would appreciate strongly, that if they don’t get on the bandwagon the road to wealth will be missed.”
I could not agree more with the above quote, but when we look as to (Why do buyers believe housing is the key to wealth?) Then we see the shadow of the Federal Reserve Bank. It was insanely low interest rates that drove the prices so high – and the FED is not done yet. Buyers of FED debt are getting only about 4 to 5% on their money while the dollar has devalued by 8.75% since just last July. The Euro deposit rate in London is 5.32% The FED should be raising rates to stop the freefall of the dollar, but they are not. The European investor is getting a negative 3.5% return on US dollar investments.
IMO the FED is trying to hold off on any housing collapse even at the risk of the dollar. Prime is 5.25% and 30 year mortgages are still in the 6% range. 30 years of potential inflation is carrying only .75% premium over short term money. This is not as insane as the inverted yield curves (long term money cheaper than short term) we had in 2002, but still fundamentally unsound economic policy.
We know that significant price drops in real estate will trigger trillions of dollar losses in FDIC banks. The FED will fight this all the way down. Now that M3 money supply is hidden from public view, the FED can create dollars without any public outcry. They added 1.2 trillion in 2006 without so much as a footnote. The days of 2% mortgage money could return.