One Chart That Explains the Entire Financial Crisis

By Mark J. Perry …

The chart above appeared on this recent CD post showing the close historical relationship between: a) the U.S. homeownership rate, and b) the share of mortgages for home purchases with a 3% down payment or less (97% loan-to-value ratio or higher), especially starting in about 1995 when they both increased sharply.

At a recent post at the SayAnythingBlog, Donny Baseball writes that if you had to look at just one chart to understand the entire financial crisis, it would be the chart above. Here’s some additional commentary:

3%! Simply amazing. 3% isn’t even close to serious. If you are only able or willing to put down 3% you simply aren’t serious about homeownership. It’s laughable. 3% would have gotten you laughed out of any bank in America prior to 1994. Yet by 2007 40% of all mortgages had less than 3% downpayments. It’s additionally frightening to wonder what that number would be for less than 4% down or 5% down, still totally laughable and un-serious levels of equity.

I have said it for a while – mortgage lending to creditworthy home buyers has been a stable, profitable, and boring business in the United States of America for about a hundred years; so for those who blame “Wall Street greed” for the crisis, I ask you “why now?” Why did greed not appear, not infect the system, not attempt to seize filthy lucre for that hundred years? Why did greed only show up at that particular moment in time? I further ask why did greed not make its way to Canada, where they did not have a housing and/or banking crisis? Is greed only a US and highly time specific phenomenon?

The answer is that government embarked, at the urging of “social justice” activists, on a policy campaign to degrade the prudential standards that prevailed in the housing lending market. The government effectively demanded and enforced irresponsible lending, and they got it. Unfortunately the government can’t repeal the iron laws of economics, so what they got was a flimsy, risk-infected financial system that was bound to crash, which it did.

This article is tagged with: The Macro View, Economy

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Dr. Mark J. Perry is a professor of economics and finance in the School of Management ( at the Flint campus of the University of Michigan ( Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University ( in Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management ( at the University of Minnesota ( Visit Dr. Perry’s Carpe Diem Blog ( for economics and finance.


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