In 2003, we had Fed Funds rates at 1%, at a time when prices were rising and the economy was still boiling even rebounding from the Internet Bubble and 9/11. This fueled irrational exuberance (as coined by Alan Greenspan) and fueled by his policies pushed money into a market that started taking bigger and bigger chances. This is the first sign of a changing market, Greenspan was focused on the stock market and the dollar, which he needed to as we were in a new post 9/11 world. The dollar was weakening among foreign currencies and dollars and investors started to flow to new markets as it became easier and easier with the new connectivity of markets globally.
Stateside, this created an over-heated and irrational sub-prime mortgage market as well as the largest expansion of home ownership in US history. So now, we are back to 1% Fed Fund rates as of today, which is the right move to create the velocity of money to move throughout the system as we see many deflationary signs and need to get consumers spending some of their monies. These deflationary signs such as lower gold, oil, housing prices and right now it is tougher to get a loan than it has been for over 25 years. So the Fed Funds rate could go even lower. We definitely have all been educated in the stock market and how it connects with the credit market and how our greater global market now works together.
So today we can celebrate low Fed Rates and also know that they played a major part in getting us here. It gave a lot of reasons to buy a new home, pay interest only and buy twice the house as you could afford, roll in your credit cards and start over. The affordability index is something to watch, which Phoenix, California and a few other markets have fallen to their 15 year average affordability. Places like Boston and Dallas have lower than average affordability. This was all a Great economic stimulus in a boom time, now we better understand the aftermath of such policies.
Bottom line, home prices increased faster than incomes, which caused everything to really be unaffordable from the crazy financial products in the market, arms, interest only, etc. Then came the foreclosures, which drove down prices in many markets back to affordability. Another thing to look at is home prices compared to the cost to rent. We still have a ways to go for the market to flush everything out. In a positive look, if I took all the articles and commentary out there, there is more and more optimism appearing in the short term. In the long term, we live in a new world that we will continually see how it unfolds and make adjustments. We have a lot to learn about everything around us, it is really all new. In 2003, there was not one person standing up trashing Greenspan policies, now there are quite a few. Hindsight is 20/20.