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17.2 • How Households Supply Financial Capital 423

would more than double every seven years. However, at the time many serious analysts saw no reason for deep

concern. After all, housing prices often change in fits and starts, like all prices, and a price surge for a few years is

often followed by prices that are flat or even declining a bit as local markets adjust.

The sharp rise in housing prices was driven by a high level of demand for housing. Interest rates were low, so

financial institutions encouraged people to borrow money to buy a house. Banks became much more flexible in their

lending, making what were called “subprime” loans. Banks loaned money with low, or sometimes no down

payment. They offered loans with very low payments for the first two years, but then much higher payments after

that. The idea was that housing prices would keep rising, so the borrower would just refinance the mortgage two
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