1. The decline in the inflation premium in interest rates. When nominal interest rates are high, payments on mortgages are high, making it hard to buy homes.
2. A general decline in real interest rates. For a long time, real interest rates were high, as realized inflation was low relative to the expectations that were built into nominal rates. Finally, over the past ten years, real rates have come down.
3. A decline in the risk premium for housing. The secondary mortgage market has become more efficient. Moreover, with the use of credit scoring in mortgage underwriting, credit decisions became more accurate (I consider this my personal contribution to social welfare--I pushed very hard for this innovation when I was at Freddie Mac).
4. Transaction costs have fallen. With the use of credit scoring, property valuation databases, and other innovations, the cost of obtaining a mortgage or refinancing a mortgage has fallen sharply. This in turn makes housing a more liquid asset, which lowers the risk premium involved in buying a home.
No comments:
Post a Comment