Over the past six months, attention and worry have shifted from America’s enormous trade deficit to its surging property markets and real-estate bubble. At least two of the reasons for high – and rising – home prices in the United States are well understood. What remains highly uncertain, however, is whether an obviously overheating market can be cooled without sending America, and its main trading partners around the world, into an economic tailspin.
The US housing boom is due, first, to low interest rates, which mean that large amounts of money can be borrowed for mortgages with moderate monthly payments. Low interest rates strengthen the ability to pay, and thus boost demand. And, with demand high and housing supply fixed – at least in the short run – prices go up.