During bad times, the blame game is the biggest game in Washington. Wall Street "greed" or "predatory" lenders seem to be favorite targets to blame for our current economic woes.
When government policy is mentioned at all in handing out blame, it is usually blamed for not imposing enough regulation on the private sector. But there is still the question whether any of these explanations can stand up under scrutiny.
Take Wall Street "greed." Is there any evidence that people in Wall Street were any less interested in making money during all the decades and generations when investments in housing were among the safest investments around? If their greed did not bring on an economic disaster before, why would it bring it on now?
As for lenders, how could they have expected to satisfy their greed by lending to people who were not likely to repay them?
The one agency of government that is widely blamed is the Federal Reserve System-- which still keeps the heat away from elected politicians. Nor is the Fed completely blameless. It kept interest rates extremely low for years. That undoubtedly contributed to an increased demand for housing, since lower interest rates mean lower monthly mortgage payments.
But an increased demand for housing does not automatically mean higher housing prices. In places where supply is free to rise to meet demand, such as Manhattan in the 1950s or Las Vegas in the 1980s, increased demand simply led to more housing units being built, without an increase in real prices-- that is, money prices adjusted for inflation.
What led to a boom in housing prices was increased demand in places where supply was artificially restricted. Coastal California was the largest of these places where severe legal restrictions on building houses led to skyrocketing housing prices. Just between 2000 and 2005, for example, home prices more than doubled in Los Angeles and San Diego, in response to rising demand in places where supply was not allowed to rise to meet it.
At the height of the housing boom in 2005, the ten areas with the biggest home price increases over the previous five years were all in California. That year, the average home price in California was more than half a million dollars, even though the average size of the homes sold was just 1,600 square feet.