From the Federal Reserve Bank of New York's Liberty Street Economics blog:
There is no consensus among economists as to what drove the rise of U.S.
house prices and household debt in the period leading up to the recent
financial crisis. In this post, we argue that the fundamental factor
behind that boom was an increase in the supply of mortgage credit, which
was brought about by securitization and shadow banking, along with a
surge in capital inflows from abroad. This argument is based on the
interpretation of four macroeconomic developments between 2000 and 2006
provided by a general equilibrium model of housing and credit.
The financial crisis precipitated the worst recession since the Great
Depression. The spectacular rise in house prices and household debt
during the first half of the 2000s, which is illustrated in the first
two charts, was a crucial factor behind these events. Yet, economists
disagree on the fundamental causes of this credit and housing boom.
A common narrative attributes the surge in debt and house prices to a
loosening of collateral requirements for mortgages, associated with
higher initial loan-to-value (LTV) ratios, multiple mortgages on the
same property, and expansive home equity lines of credit....MORE
