What created the housing boom over the past several years? Cheap money.
What cause the market to “collapse”? Too much cheap money.
According to the Wall Street Journal:
In an apparent and rare in-house critique, the president of the Federal Reserve Bank of Dallas said that because of faulty inflation data, the Fed kept interest rates too low for too long earlier this decade, fueling speculative housing activity.
Dallas Fed Chief Richard Fisher says that revisions to the personal consumption expenditures showed inflation running a half a percentage point higher than originally estimated.
“In retrospect, the real Fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been,” Mr. Fisher said.
“In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today…the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the [Fed’s] task of achieving…sustainable noninflationary growth.”
Take that, Greenspan!
Mr. Fisher said inflation, at about 2.5% now, is still higher than his “comfort zone,” but it is possible it “has peaked and is finally heading lower.”
Source: Official Says Bad Data Fueled Rate Cuts, Housing Speculation – By Greg Ip, The Wall Street Journal Online