OnionEater said:
Are you aware that the first half and the second half of your post contradict each other? If your chart doesn't explain what caused home prices to begin falling, then it hasn't gone a very long way in explaining the onset of the Great Recession.
The linkage that I was attempting to illustrate was between the acceleration of deteriorating conditions in one specific sector (via home prices) to the aggregate economy (via its impact on holders of debt specific to that sector). Sorry if that wasn't clear.
The
onset of the decline in housing prices was, IMO and as others have alluded to but with differing descriptions, largely caused by what I refer to as '
the greater fool theory.' While most often used in reference to the tech bubble and other episodes of soaring asset prices, the greater fool theory describes the willingness of purchasers to accumulate some risky asset in the belief that, "yeah, I paid way too much, but somewhere out there is a bigger fool than I, one who will take this house/tech stock/take your pick off my hands at an even higher price."
Worked well for quite a while, for both tech stocks and houses. But as Lord Tammerlain and others have noted, the impact of excessive leverage may magnify profits, but it also
really, really magnifies losses. Consequently, it didn't take much of a tightening in credit standards to start the house of cards tumbling.
Receiving less attention but significant nonetheless in igniting the fall was the impact of higher resets on option ARMS and other 'teaser rate' mortgages. As significantly higher resets loomed, it became apparent that a significant number of mortgagees were not going to be able to service those loans; as those mortgages (typically the very weakest and least creditworthy to begin with) began to default and/or the properties put up for sale, the 'run on the bank' began in earnest.
Both the tech stock and the home price bubbles re-affirmed the old market axiom that the market will do whatever it takes to inflict the maximum amount of damage on the maximum number of participants. Whats next, do you suppose?