I was working backwards above but the whole crisis makes perfect sense if you start with lack of high ROE investment opportunities in the world as a whole, with local markets struggling to incorporate this information appropriately. To institutional investors, ranging from pension funds to insurance companies, fixed income investments appear disproportionately attractive in this environment, driving long-term interest rates low. Consequently, mortgage rates drop, making equity investment in housing attractive for homeowners. Even in the absence of a well-functional mortgage market (common in other countries that also had a significant housing boom) equity investment in housing appears to have the characteristics of a fixed-income investment, which again appears attractive in the absence of high ROE investments elsewhere. All of this boosts housing prices significantly above cost, which creates apparent arbitrage opportunities for the homebuilding industry and related industries (mortgage, finance, materials, machinery, etc). This temporarily cushions the blow to the economy of not having high ROE investment opportunities, by becoming the high ROE investment opportunity itself. But since the demand for housing is driven by miscalculation to start with (lower long-term interest rates driven by lower expected economic growth should not lead to an increase in real estate prices, except to the extent that the underlying real estate itself represents a bottleneck to growth), those high ROE investment opportunities turn out to have been illusory and cause significant losses for whoever in the supply chain is stuck with the excess inventory. The growth in supply of housing uncovers the illusion and the resulting price volatility causes a credit crisis and a severe economic downturn, as the economy faces both the temporary shock of price volatility and the long term shock of lack of high ROE investment opportunities.
And what explains the lack of high ROE investment opportunities in the first place? There are many places to look, but the biggest is the supply bottleneck in energy. While the growth in information technology has been impressive, as is the consequent potential for increase in productivity, none of this can increase return on capital against the backdrop of energy supply bottleneck. This is hard to explain, though my posts in the following thread effectively discuss the logic behind why energy scarcity will lead to low long term interest rates and low growth, not high energy prices:
I don't know who wrote that, but I thank a loyal MR reader for pointing it out to me. Here is related data on MPK.