I think eric was referring to why prices are so high, but that's more of a supply and demand issue. I think the economy did play a role in what is happening in the housing market now, although it may not be directly correlated. Most of your ARMs follow the fed rate. Back a few years ago when the fed rate was at 1%, you could get a loan in the mid to high 3% and low 4%, with some options just slightly above the fed rate. It made more sense to get an ARM if you weren't planning on living in a home that long and wanted to keep your payments low. When the feds started raising their rate to control inflation, I think that's when your I/O and negative amoritization loans started becoming popular with the masses because it still kept payments low and your equity was building through appreciation as opposed to traditionally building equity through paying off your loan. That kept demand for homes high...any joe shmoe could get a loan...495 fico? no problem! Re-financing and HELOCs didn't help either. Well now that joe shmoe's rate is adjusting and appreciation hasn't gone up as much as they hoped, they can't afford the payments, they've maxed out their equity and they might have been laid off because their company had cut backs. You're right, buyers were short sighted, but it didn't help that lender guidelines were so lax and that many mortgage brokers doctored documents to get their loan through. What many buyers also didn't realize was that the minute they buy a home, they automatically lose about 7-8% off the top (1.5-2% for closing costs and 5-6% for broker commissions). So if they decide to sell, appreciation must go at least 8% for them to break even. And when a buyer doesn't have any equity in a home, they really have nothing to lose.