Thursday, October 14, 2010

Home prices and government credit

According to Robert Schiller in his book Irrational Exuberance, between 1900 and 2000 home prices in the U.S. increased by an average of 3.4 percent annually, slightly above the average inflation rate.  Prices were firmly tied to people’s ability to pay, which is a function of income and credit availability.

From 1997-2006, home prices gained an astounding 19.4 percent annually on average, yet incomes stayed mostly flat.  How could people pay so much?  The difference was credit.  Government made credit cheaper and easier to get.

Cheap credit today is made possible by our unsound monetary system.

---  From How an Economy Grows and Why It Crashes by Peter Schiff and Andrew Schiff, Chapter 15

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