You’re looking at it MACRO, I am looking at it MICRO. Why did the housing bubble burst? I think that it had a lot do with people getting homes they could barely afford. When something changed, spike in gas price and the attendant rise in food prices, many of the people just defaulted. It started to snowball when people started to lose their jobs also. Yes, it was due to derivatives but many of these investments relied on stability in the housing market and all that started to fall apart when over indebted people stopped making payments. So irresponsible banks lending to irresponsible people begat the crash. It was a house of cards built on greed by all parties, big-shots and little-shots who wanted to live beyond their means.
Don’t leave out the CRA and flippers. Between the two, the housing market was pretty fragile, and flippers contributed to the bubble. When prices went down, they also added to those walking away.
Yes you are correct. The housing was in a huge bubble. The bubble was created by Barney Frank and company who wanted every person wanting home ownership be given a mortgage loan regardless of their ability to pay. If banks refused the loans, they were threatened with serious investigations.
But the immediate cause was the collapse of the MBS & derivatives by Wall Street banks. If Glass-Steagall was still in effect, derivative gambles using depositor’s money would not be legal, and it is entirely possible the housing bubble may have just deflated slowly instead of bursting.