Causes of the 2000s United States housing bubble

Inflation-adjusted housing prices in Japan (1980–2005) compared to home price appreciation the United States, Britain, and Australia (1995–2005).

Approximate cost to own mortgaged property vs. renting.
An approximate formula for the monthly cost of owning a home is obtained by computing the monthly mortgage, property tax, and maintenance costs, accounting for the U.S. tax deduction available for mortgage interest payments and property taxes. This formula does not include the cost of foregoing the standard deduction (required for taking the tax deduction). Assuming a home cost of P dollars, yearly interest rate r fixed over N years, marginal income tax rate , property tax rate (assumed to be 0.5–2% of P), and yearly maintenance cost rate (assumed to be 0.5–1% of P), the monthly cost of home ownership is approximately[1]

For example, the monthly cost of a $250,000 home at 6% interest fixed over 30 years, with 1% property taxes, 0.75% maintenance costs, and a 30% federal income tax rate is approximately $1361 per month. The rental cost for an equivalent home may be less in many U.S. cities as of 2006. Adding a down payment or home equity to this calculation can significantly reduce the monthly cost of ownership, while significantly reducing the income stream that the downpayment would generate in a long term CD. Including the monthly cost of forgoing the standard deduction ($10,000 for a married couple), the added cost (the reduction in tax savings) of (deduction * tax_rate / 12) would increase the cost to buy a home by $250/mo, to $1611 for a married couple filing jointly in the example above.

Equivalent price-to-earnings (P/E) ratio for homes.
To compute the P/E ratio for the case of a rented house, divide the price of the house by its potential yearly earnings or net income, which is the market rent of the house minus expenses, which include property taxes, maintenance and fees. This formula is:

For the example of the $250,000 home considered above, the P/E ratio would be 24 if this home rents for $1250 per month. Fortune cites a historic range of 11 or 12 for the simpler price-to-rent ratio.[2]

Observers and analysts have attributed the reasons for the 2001–2006 housing bubble and its 2007–10 collapse in the United States to "everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan".[3] Other factors that are named include "Mortgage underwriters, investment banks, rating agencies, and investors",[4] "low mortgage interest rates, low short-term interest rates, relaxed standards for mortgage loans, and irrational exuberance"[5] Politicians in both the Democratic and Republican political parties have been cited for "pushing to keep derivatives unregulated" and "with rare exceptions" giving Fannie Mae and Freddie Mac "unwavering support".[6]

According to a 2018 review of existing evidence, "inflated house-price expectations across the economy played a central role in driving both the demand for and the supply of mortgage credit before the crisis".[7] The review concluded that the crisis was not driven by reckless lending by lower classes, but rather greater mortgage lending across all income groups.[7]

U.S. Median Price of Homes Sold
  1. ^ A derivation for the monthly cost is provided at usenet's sci.math FAQ Archived 2008-07-04 at the Wayback Machine.
  2. ^ Tully, Shawn (2003-12-22). "The New Home Economics". Fortune.
  3. ^ Cite error: The named reference factcheck was invoked but never defined (see the help page).
  4. ^ Cite error: The named reference indiviglio was invoked but never defined (see the help page).
  5. ^ A Summary of the Primary Causes of the Housing Bubble and the Resulting Credit Crisis: A Non-Technical Paper Archived 2013-03-07 at the Wayback Machine By JEFF HOLT
  6. ^ McLean, Bethany (2010–2011). All the Devils Are Here. NY: Portfolio/Penguin. pp. 365. ISBN 9781101551059.
  7. ^ a b Adelino, Manuel; Schoar, Antoinette; Severino, Felipe (2018). "The Role of Housing and Mortgage Markets in the Financial Crisis". Annual Review of Financial Economics. 10 (1): 25–41. doi:10.1146/annurev-financial-110217-023036. hdl:1721.1/122348. ISSN 1941-1367. S2CID 158439236.