More than lower interest rates fueled the recent real estate boom

The credit innovation thing is what is perpetuated in the media - but for one it is not the innovation that caused the bubble. Innovation leads to liquidity which in, and of itself is good. What we had in the last bubble, was carelesseness, the ultimate moral hazard - otherwise known as OPM on the street (other people's money). You see, if it ain't your monies at risk, you are much less likely to care if the loans are good or bad. That is why the most popular buzzword in the media is a misnomer - "subprime". There was no subprime contagion, for subprime was never the problem of the bubble or the bust. If anything, it was subprime underwriting - not subprime loans. It was the careless underwriting standards borne by banks that did not have to face the consequences of just giving out money to anyone (at least past their one year risk retention stipulations, hence the popularity of 2 year ARMs). Thus, it is prime, subprime, alt a, alt b, and everything in between where the actual problems will manifest. Those who follow the media buzzwords or actually believe the BS of the ratings agencies who were compensated by the entities they were rating on a basis that was contingent on a favorable rating, are bound to be surprised by an apparent "contagion", again and again, and again, and again, and......

Before that lax lending standards really took off gentrification pushed up housing prices in the urban areas of the US where upper middle class commuters chose to live closer to the center of the metro areas (the inverse of what happened in the last major housing cycle that developed and propped up the price of the suburbs and exburbs). This is fundamentally sound, for price did not outstrip income. Of course there are several socioeconomic factors that come into play which are too complex to get into here (but I will get into them in other posts with fun models to download and play with :-) Gentrification led to sprawl (due, in part, to the displaced urbanites), and both were exacerbated by lower interest rates and flexible funding/easy credit, like jet fuel on smoking tinder. Once writing loans off of someone else's balance sheet became popular and combined with the great global macro experiment, then fundamentals ran amuck and cap rates dropped to the level of, or even below that of the risk free rates. Such a level is unsustainable (eventhough you have some investors who are still trying to push cap rates towards zero, I have seen large deals done at 2% with money markets yielding over 4%), hence where we are now.

It pays to have intricate knowledge of the markets from a local perspective, which is why I'm taking my time to take positions in the foreign (non-US) markets. I have intimate knowledge of some US markets, but that does not necessarily help me in the foreign markets. From what I have observed thus far, they are behind the US, but we will export our own brand of "burst" soon enough.