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Saturday, October 25, 2014

112. What Caused the Housing Market Burst of 2008?



Recently, I read the claim was made that the housing market bubble burst was the fault of big, greedy banking corporations. While banking corporations are partially at fault the issue is a lot more involved than simply blaming one party in this mess.

Let me say this is a very complex issue and this may be an over simplification of what occurred. I did some reading recently and this is a very rough look at the Housing Market Burst of 2008.

Before 2008 there was a trend for housing price increases. From 1997 to 2006 the typical American household increased by 124% according to Newsweek.


This kind of increase was not sustainable. Before 2008 consumers were saving less, borrowing more, and spending more. Easy credit, lax government regulations, the belief that houses would continue to appreciate all contributed to consumers getting mortgages they couldn’t afford with ARM (adjustable rate mortgages) loans.

Further aggravating this issue was during 2008 the typical U.S. household had 13 credit cards with 40% of those carrying a balance (paying interest). This was up from 6% carrying a balance in 1970 according to Newsweek.

The ratio of median household price to median household income was between 2.9 and 3.1 from 1980 to 2001. It rose to 4.0 in in 2004 and then to 4.6 in 2006. Meaning people were buying houses 4 to 4.6 times or more their household income according to Newsweek.  (See: http://www.newsweek.com/id/163449)

The housing market burst in 2008 can be blamed to some extent or another on financial institutions, regulators, credit agencies, government housing policies, predatory lenders, builders, and consumers. A big issue was many lenders pushed for ARM (adjustable rate mortgages) loans and subsequently consumers that were dying to live the “American dream” of home ownership signed the dotted line. U.S. households had become significantly indebted in the 2000’s. According to the Economist the ratio of disposable personal income rose from 77% in 1990 to 127% in 2007. (See: http://www.economist.com/node/12637090 )

Because home values started plummeting U.S. homeowners had a harder time refinancing their ARM loans. Securities backed with mortgages, including subprime ARM loans, held by global firms lost their value overnight. This meant the U.S. economy now had less global investors providing the easy credit sub-prime mortgage holders primarily with ARM loans desperately needed. It was a trickle down effect as more people were forced to default on their homes lenders kept increasing the interest rates to reduce their organizations risk. Home values dropped on average 30%. The U.S. stock market lost 50% of it’s value by 2009. This affected global markets in Europe, Asia, S. America, etc. as well. The effect on Europe for example was job losses and severe banking challenges as well.

Between June 2007 and November 2008 Americans lost more than a quarter of their net worth. The S&P 500 was down 45% in November 2008 from it’s 2007 high. The U.S. entered a deep recession with the loss of nearly 9 million jobs during 2008 and 2009 which reflected a 6% loss in the workforce.

The housing market burst could very well have affected me. As a part-time graduate student working retail for about $11 an hour I was approached multiple times by what I would consider predatory lenders between 2005 and 2008. The pitch I was given was I could qualify for a house mortgage, let the house appreciate, and then refinance the house a few years down the road with the equity I’d “earned”. Thankfully, I didn’t fall for it. No way I should have qualified for a loan or even been approached for a loan with my income level. Somebody made big money convincing people to apply for and obtain mortgages they couldn’t afford. There seems to also have been on average a lot of exaggeration on the part of both consumers and predatory lenders as to the applicant's yearly household income.



Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. Lenders made loans that they knew borrows could not afford and that could cause massive losses to investors in mortgage securities.” (See: http://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html

Hopefully we’ve learned from our mistakes. Yet, clearly by the information above it should be clear it  was not the fault of simply big business.

What do you think of the Housing Market Burst of 2008? Has enough been done to prevent such a catastrophe in the future? How did the burst affect you? Leave a comment!

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