The other factors that have changed are the tax exclusion on mortgage interest and capital gains from home sales and interest rate manipulation. The mortgage interest exclusion eventually led people to devise and ask for "piggyback" loans instead of paying for private mortgage insurance, which was not tax deductible. The capital gains exclusion on housing sales up to $500,000 led people to overvalue homes as investment assets, since they had less tax drag than other investments. Interest rate manipulation lowered the real monthly cash outlay for payments, which drove up the actual home prices. It also increased the risk for banks, because they were accepting a lower risk premium on volatile collateral.
Nowhere else in the economy do we so explicitly support ordinary folks to make highly leveraged investments. When housing price volatility increased, the down payment requirements should have gone up as the risk premium increased. Instead, our government conspired and is still conspiring to drive them down, backed with our tax dollars buying the loans and now buying up the MBS.
Nowhere else in the economy do we so explicitly support ordinary folks to make highly leveraged investments. When housing price volatility increased, the down payment requirements should have gone up as the risk premium increased. Instead, our government conspired and is still conspiring to drive them down, backed with our tax dollars buying the loans and now buying up the MBS.