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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
market? And was the CDO, because of its ratings-driven investors, distorting the
mortgage market?
The numbers were stark. Nationwide, house prices had never risen so far, so fast.
And national indices masked important variations. House prices in the four sand
states, especially California, had dramatically larger spikes—and subsequent de-
clines—than did the nation. If there was a bubble, perhaps, as Fed Chairman Alan
Greenspan said, it was only in certain regions. He told a congressional committee in
June that growth in nonprime mortgages was helping to push home prices in
some markets to unsustainable levels, “although a ‘bubble’ in home prices for the na-
tion as a whole does not appear likely.”
Globally, prices jumped in many countries around the world during the s. As
Christopher Mayer, an economist from Columbia Business School, noted to the
Commission, “What really sticks out is how unremarkable the United States house
price experience is relative to our European peers.” From to , price in-
creases in the United Kingdom and Spain were above those in the United States,
while price increases in Ireland and France were just below. In an International Mon-
etary Fund study from , more than one half of the developed countries ana-
lyzed had greater home price appreciation than the United States from late
through the third quarter of , and yet some of these countries did not suffer
sharp price declines. Notably, Canada had strong home price increases followed by
a modest and temporary decline in . Researchers at the Federal Reserve Bank of
Cleveland attributed Canada’s experience to tighter lending standards than in the
United States as well as regulatory and structural differences in the financial system.
Other countries, such as the United Kingdom, Ireland, and Spain, saw steep house
price declines.
American economists and policy makers struggled to explain the house price in-
creases. The good news was the economy was growing and unemployment was low.
But, a Federal Reserve study in May presented evidence that the cost of owning
rather than renting was much higher than had been the case historically: home prices
had risen from times the annual cost of renting to times. In some cities, the
change was particularly dramatic. From to , the ratio of house prices to
rents rose in Los Angeles, Miami, and New York City by , , and , re-
spectively. In , the National Association of Realtors’ affordability index—which
measures whether a typical family could qualify for a mortgage on a typical home—
had reached a record low. But that was based on the cost of a traditional mortgage
with a down payment, which was no longer required. Perhaps such measures
were no longer relevant, when Americans could make lower down payments and ob-
tain loans such as payment-option adjustable-rate mortgages and interest-only mort-
gages, with reduced initial mortgage payments. Or perhaps buying a home continued
to make financial sense, given homeowners’ expectations of further price gains.
During a June meeting, the Federal Open Market Committee (FOMC), com-
posed of Federal Reserve governors, four regional Federal Reserve Bank presidents,
and the Federal Reserve Bank of New York president, heard five presentations on
