This Is My Favorite Chart On The Housing Market

The housing market in America is mainly a function of how loose monetary policy is. Demand matters, but it’s not the demand of physical homes that is important. It’s demand for mortgage loans on the secondary market.

When banks can borrow cheaply, they can issue mortgage loans at relatively low interest. A lower interest rate means a lower monthly payment, which means that a home priced at a certain point is now affordable for a whole new set of potential buyers. If the mortgage loans issued to these buyers can be easily sold on the secondary market, or packaged up as mortgage-backed securities and sold that way, most of the non-payment risk can be passed off and there is nothing stopping banks from issuing more and more loans to sketchier and sketchier buyers. This is how bubbles are made.

That is why this is my favorite housing chart: