Mark Toma recently outlined the primary causes in a recent article for www.seekingalpha.com

First, you need a source of fuel to feed the fire;

• Low interest rates infected liquidity into the system;
• This was enhanced by the high savings in Asia and;
• Cash accumulations within oil producing nations plus;
• Leverage from within the financial markets diverted dollars into housing

Second, you need time for the fire to spread – no one was watching the fire.

Bank regulators didn’t have a system in place to prevent bubbles. In fact, they didn’t see the bubble developing until it was too late to avert damage. Lack of regulation provided the time.

The Nobel Prize winning economist Vernon Smith notes that in the experiments he has conducted that reproduce bubbles in the lab, the existence and size of bubbles depends critically upon the amount of “cash slopping around in the system.”

In conclusion, Toma says “So I think the bubble itself was driven by ‘cash slopping around in the system’ that originated from several sources, the Fed being one, and the regulatory failures (such as failing to provide sufficient transparency so that the smoke from the fire could be spotted in time, and failing to limit leverage) allowed the fire to spread readily and do major damage.”

This may explain the fuel (supply) that fed the fire but not identify the catalyst or the oxygen (demand) that enabled the bubble.

Needless to say, the housing bubble could not have occurred without an eager market of buyers, sellers and facilitators to expand it to its limits.

In retrospect, we can read the signpost that weren’t so legible along the way. Hopefully, this has given us the presence of mind, so history does not repeat.