Subprime Market Drove the US Housing Boom

William Pool, St. Louis Federal Reserve President, said today that the recent US housing boom was fueled by subprime developments in the securities markets. “This cycle was really quite different and the boom was driven by the growth of the subprime market and the securitization of those markets,” Pool said during a policy conference hosted by the St. Louis Fed.

“I think this housing cycle is in many respects quite different from previous housing cycles, and has unique characteristics from the housing cycles from the postwar period, and is unlikely to give us much insight into the housing market for the longer run,” Poole said. The market was driven by borrowers, whom in previous markets would never had qualified for a mortgage, bought homes in a feeding frenzy. Many of these subprime mortgages, which were designed for borrowers with risky credit, started with a low interest rate, that was fixed for generally two years, adjusted into payments that borrowers could no longer afford. When this happens these borrowers are forced to sell their homes for lower than current market values. This produced a chain effect where eventually people were forced into foreclosure because they owed more than their house was worth.

To read more about the subprime market that drove US housing boom goto Reuters.