Due to the fact that the Fed was flooding banks with reserves, new financial engineering inventions appeared on the credit market, such as loans with no down payment. Loosening loan requirements did not stop with low- and middle-income people. No wonder: by loosening requirements for everyone, banks could earn even more. Prices rising constantly due to rising demand and loose credit standards were a breeding ground for speculation. People bought houses not only to live in them, but also to sell them profitably in the future. When the boom was nearly at its end, around 25 percent of the houses were bought for speculation. Many people bought the property, made some improvements and resold it or simply waited for its price to go up.
Just before the crisis some said that the more risky subprime loans were the only cause for concern. It turned out later that the problem was much more than that. The additional problem was that many people took variable rate loans. Alan Greenspan himself encouraged taking them. With variable rate loans, the main risk for borrowers was having to repay more in the event of an increase in interest rates. This type of loan suited people who bought property for speculation, because they did not plan keeping it for long. It turned out that variable interest was more commonly employed in average-risk loans than in subprime loans. When prices peaked, and then began to fall slightly, the number of real estate foreclosures skyrocketed. No wonder. Imagine that you bought a house by taking a loan that originally had a low interest rate and no down payment needed. You hoped that the prices would go up, but it turned out that the bonanza was over and the prices began to fall. A reasonable solution was to stop repaying the loan and let the bank take the property back.
The administration encouraged speculation and boosted demand in other ways, for example by introducing capital gains tax exemption upon the sale of real estate, or tax deductions for taxpayers with a mortgage loan. Curiously, a taxpayer was not eligible for the deductions if she paid for her house in cash or rented it. Developers were offered free land and tax privileges just so they would build new houses. As you can see, speculative mania was to be expected, as the government did everything in its power to make it happen.