Study: Consumers Were Too Optimistic

Lax lending standards can’t be blamed for the housing bubble, according to a study by the New York Federal Reserve.
The study released Thursday contends that it was consumer confidence that persuaded people that they could afford to pay higher prices for housing, not easy money.
The study argues that consumers, who thought they had been working harder since the 1990s, believed that their paychecks would increase. Their optimism continued until 2007, when it was clear that there was no reason for such a rosy view.
“What appears in retrospect to be relatively lax credit conditions in the early part of this decade may have emerged in part because of then-justifiable, although ultimately misplaced, optimism about income growth," says James Kahn, author of the study and a professor of economics at Yeshiva University.
Kahn says that if productivity growth returns, housing prices could bottom out and begin growing again. But if productivity continues to slow or grow only very modestly, prices could continue to stay low or even decline further.
Source: Reuters News (07/09/2009)