January 31, 2008

We have argued that the housing market would be at the center of any storm for two different reasons. One being that home mortgages are one of the few interest deductions available to many borrowers, thus the deductibility resulted in a higher loan to value ratio than we would have seen otherwise. The other being that the carry trade, tax advantages and economic prosperity all funneled into a higher demand for housing. The 1997 change in tax treatment of residential real estate led to an increase in the demand for owner occupied housing. The low interest rate policy of the Fed reduced the carrying costs, not surprisingly the demand for and the price of owner occupied housing surged.

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