//
The Housing Bubble

Many of you have probably heard of the housing bubble. The price of homes has been increasing at a steady rate for years, until prices fell dramatically in 2007. In order to understand this phenomenon, one must have a basic understanding of supply and demand.
Prices are set by supply and demand. The way it works is this: The price is set at the point where the number of of people willing to pay that much for a product is equal to the supply. That way, there is neither a surplus or a lack. For example, imagine you have five men that all want a snow globe. One man has $10, one has $20, one has $30, another has $40, and the last has $50. There are five men, but only three snow globes. If the salesman charges $10, all of the men can afford the snow globe, but the salesman can’t supply for that many men. Assuming that each man is willing to spend all his money on a snow globe, the best price is $30. That way, only the last three men can afford a snow globe, so the supply is equal to the demand.
Now that you understand supply and demand, let’s get back to the housing market. Wanting to make everyone happy, the government issued a series of extremely inexpensive mortgages, and passed legislation forcing banks to do the same. This increases the number of people willing to buy homes at higher prices, thus artificially increasing the values of homes. Prices continued to rise, but the people who bought the houses lacked the money to pay them off, so thousands defaulted on their loans. The banks foreclosed on the homes, losing huge investments. Having lost their savings, a large section of the buyers in the housing market dropped out. This decreased the the demand by a significant portion, and the prices crashed, demonstrating once again that over-extensive federal involvement in the economy is a very bad idea.

That’s the John Galt line.