So I was thinking on this a bit more over the last few day and have some more thoughts on the combination of events that came together:
- The anomaly in rates, specifically, the short term rate dropping to record levels, 1%. And of course, the subsequent rise back to more normal levels.
- The surge in the high end home prices. Of course you can say that the rates drove the prices higher, as the same dollar bought far more mortgage at 3% than it did at 9%.
- The no-doc mortgages, brokers filling in applications that were signed when still blank.
- Between fancy computer modeling and ratings agencies that did not do their job, much of the paper got rated AAA when it should be C or less. (my thanks to Douglas Johnson for pointing this last factor out to me)
An article in the August 5th New York Times gave a good overview called “Housing Busts and Hedge Fund Meltdowns: A Spectator’s Guide.” It still leaves some questions unanswered, but it’s worth a quick read.