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December 2007
Masters of Illusion
Housing booms
In Brief
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Housing prices have soared both when interest rates were low, as in the early 2000s, and when interest rates were high, as in the 1970s. Two Minneapolis Fed economists suggest that “inflation (or money) illusion” may explain this phenomenon.
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If some investors don’t distinguish between real and nominal rates of interest (forgetting to account for inflation) but others do, lending and borrowing between the two investor types can explain housing booms in both high and low interest rate environments.
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The economists hope to integrate this model of heterogeneous housing and bond investors with broader research that includes equity markets.
Masters of Illusion [complete article]
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