Moreover, the historically low level of interest rates may have been due, in part, to large accumulations of savings in some emerging market economies, which acted to depress interest rates globally (Bernanke 2005). However, other analysts have suggested that such factors can only account for a small portion of the increase in housing activity (Bernanke 2010).
In the period after the 2001 recession, the Federal Open Market Committee (FOMC) maintained a low federal funds rate, and some observers have suggested that by keeping interest rates low for a “prolonged period” and by only increasing them at a “measured pace” after 2004, the Federal Reserve contributed to the expansion in housing market activity (Taylor 2007). A number of factors appear to have contributed to the growth in home mortgage debt.
Mortgage debt of US households rose from 61 percent of GDP in 1998 to 97 percent in 2006. The expansion in the housing sector was accompanied by an expansion in home mortgage borrowing by US households. Roughly 40 percent of net private sector job creation between 20 was accounted for by employment in housing-related sectors. Home ownership in this period rose from 64 percent in 1994 to 69 percent in 2005, and residential investment grew from about 4.5 percent of US gross domestic product to about 6.5 percent over the same period. Average home prices in the United States more than doubled between 19, the sharpest increase recorded in US history, and even larger gains were recorded in some regions. This expansion began in the 1990s and continued unabated through the 2001 recession, accelerating in the mid-2000s. The recession and crisis followed an extended period of expansion in US housing construction, home prices, and housing credit. In addition, the financial crisis led to a range of major reforms in banking and financial regulation, congressional legislation that significantly affected the Federal Reserve. The Federal Reserve has provided unprecedented monetary accommodation in response to the severity of the contraction and the gradual pace of the ensuing recovery. 1Nonetheless, in the fall of 2008, the economic contraction worsened, ultimately becoming deep enough and protracted enough to acquire the label “the Great Recession." While the US economy bottomed out in the middle of 2009, the recovery in the years immediately following was by some measures unusually slow. In response, the Federal Reserve provided liquidity and support through a range of programs motivated by a desire to improve the functioning of financial markets and institutions, and thereby limit the harm to the US economy. That year several large financial firms experienced financial distress, and many financial markets experienced significant turbulence. In 2007, losses on mortgage-related financial assets began to cause strains in global financial markets, and in December 2007 the US economy entered a recession. The period known as the Great Moderation came to an end when the decade-long expansion in US housing market activity peaked in 2006 and residential construction began declining.
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