Government manipulating the market
If there is one overriding conclusion that can be drawn form the current financial crisis (current as of this writing,) is that the nightmare we now find ourselves in is not in fact a failure of free markets but in fact largely created by activist government.
The subprime crisis actually arose out of the mid-nineties redux of the Community Reinvestment Act. The Act, which like much bad government was created with good intentions, sought to force banks that were reluctant to lend in impoverished neighborhoods to lend to challenge borrowers with little or no money to put down. Banks were subject to federal rules which insisted that banks “Be good corporate citizens,” or else. And so the banks did what they were forced to do.
Since real estate in the mid 90s was a reasonably priced asset the influx of new money into new areas of the real estate market served to spark price appreciation above the historical average rate for real estate. Though initially not huge, the growth in real estate in the late 90s especially in some areas traditionally “overlooked” by banks, heralded much greater growth to come in the early 2000s.
Also during the late 90s much of the middle and upper class in this country were doing quite well in their 401k investment vehicles. The Dow soared in these years, creating new “paper millionaires” almost overnight. Unfortunately as the new decade dawned stocks headed down in a hurry. The “new economy” wasn’t in fact so new after all. It was the same old economy with the same old stubborn rules of supply and demand.
But as the paper millionaires cashed out what they had left, they began to look for new, more “tangible” investments. Speculative money began to move quickly into real estate as people became increasingly disgusted with the stock market.