Consider Figure 17.9 below. As can be seen, real estate prices began to bubble in about 2005. Use the house price arbitrage equation to explain how each of the following may have contributed to this bubble:
a. Interest rates, in particular mortgage rates, which fell between 2000 and 2005;
b. Increasingly lax lending practices, with lower down payments, for home mortgages; and
c. The incentive to invest in residential real estate as home prices in Las Vegas increased.
Figure 17.9: Las Vegas Housing Price Index: 1995-2012
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

Question

Consider Figure 17.9 below. As can be seen, real estate prices began to bubble in about 2005. Use the house price arbitrage equation to explain how each of the following may have contributed to this bubble:
a. Interest rates, in particular mortgage rates, which fell between 2000 and 2005;
b. Increasingly lax lending practices, with lower down payments, for home mortgages; and
c. The incentive to invest in residential real estate as home prices in Las Vegas increased.
Figure 17.9: Las Vegas Housing Price Index: 1995-2012  
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)

Quizplus · Accepted Answer

The Answer of Consider Figure 17.9 below. As can be seen, real estate prices began to bubble in about 2005. Use the house price arbitrage equation to explain how each of the following may have contributed to this bubble:
a. Interest rates, in particular mortgage rates, which fell between 2000 and 2005;
b. Increasingly lax lending practices, with lower down payments, for home mortgages; and
c. The incentive to invest in residential real estate as home prices in Las Vegas increased.
Figure 17.9: Las Vegas Housing Price Index: 1995-2012  
(Source: Federal Reserve Economic Data, St. Louis Federal Reserve)