2000s United States housing bubble
The 2000s United States housing bubble or house price boom or 2000s housing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions, a real estate bubble was the impetus for the subprime mortgage crisis. Housing prices, which peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2011. On December 30, 2008, the Case–Shiller home price index reported the largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States.
Increased foreclosure rates in 2006–2007 among U.S. homeowners led to a crisis in August 2008 for the subprime, Alt-A, collateralized debt obligation, mortgage, credit, hedge fund, and foreign bank markets. In October 2007, Henry Paulson, the U.S. secretary of the treasury, called the bursting housing bubble "the most significant risk to our economy".
A bubble had the potential to affect not only on home valuations, but also mortgage markets, home builders, real estate, home supply retail outlets, Wall Street hedge funds held by large institutional investors, and foreign banks, increasing the risk of a nationwide recession. Concerns about the impact of the collapsing housing and credit markets on the larger U.S. economy caused President George W. Bush and the chairman of the Federal Reserve Ben Bernanke to announce a limited bailout of the U.S. housing market for homeowners who were unable to pay their mortgage debts.
In 2008 alone, the United States government allocated over $900 billion to special loans and rescues related to the U.S. housing bubble. This was shared between the public sector and the private sector. Because of the large market share of Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation as well as the Federal Housing Administration, they received a substantial share of government support, even though their mortgages were more conservatively underwritten and actually performed better than those of the private sector.
Background
Land prices contributed much more to the price increases than did structures.Housing bubbles may occur in local or global real estate markets. In their late stages, they are typically characterized by rapid increases in the valuations of real property until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This may be followed by decreases in home prices that result in many owners finding themselves in a position of negative equity—a mortgage debt higher than the value of the property. The underlying causes of the housing bubble are complex. Factors include tax policy, historically low interest rates, lax lending standards, failure of regulators to intervene, and speculative fever. This bubble may be related to the stock market or dot-com bubble of the 1990s. This bubble roughly coincides with similar ones in the United Kingdom, Hong Kong, Spain, Poland, Hungary and South Korea.
While bubbles may be identifiable in progress, bubbles can be definitively measured only in hindsight after a market correction, which began in 2005–2006 for the U.S. housing market. Former U.S. Federal Reserve Board Chairman Alan Greenspan said "We had a bubble in housing", and also said in the wake of the subprime mortgage and credit crisis in 2007, "I really didn't get it until very late in 2005 and 2006.".
The mortgage and credit crisis was caused by the inability of a large number of home owners to pay their mortgages as their low introductory-rate mortgages reverted to regular interest rates. Greenspan warned of "large double digit declines" in home values "larger than most people expect". Freddie Mac CEO Richard Syron agreed with Greenspan's acknowledging a housing bubble and concurred with Yale economist Robert Shiller's warning that home prices appear overvalued and that the correction could last years, with trillions of dollars of home value being lost.
Problems for home owners with good credit surfaced in mid-2007, causing the United States' largest mortgage lender, Countrywide Financial, to warn that a recovery in the housing sector was not expected to occur at least until 2009 because home prices were falling "almost like never before, with the exception of the Great Depression". The impact of booming home valuations on the U.S. economy since the 2001–2002 recession was an important factor in the recovery, because a large component of consumer spending was fueled by the related refinancing boom, which allowed people to both reduce their monthly mortgage payments with lower interest rates and withdraw equity from their homes as their value increased.
Timeline
Contemporary discussion of the housing price boom
During the run up in asset prices and before the Great Recession, various parties described the housing market as a bubble or contested that designation.Predictions of a bubble
Especially in late 2004 and early 2005, numerous economic and cultural factors led several economists to argue that a housing bubble existed in the U.S. Dean Baker identified the bubble in August 2002, thereafter repeatedly warning of its nature and depth, and the political reasons it was being ignored. Prior to that, Robert Prechter wrote about it extensively as did Professor Shiller in his original publication of Irrational Exuberance in the year 2000. Peter Schiff also called the bubble early on and was vocal about it on television and wrote a book detailing his predictions of the fallout.An August 2008 article in The New York Times reported that in mid-2004 Richard F. Syron, the CEO of Freddie Mac, received a memo from David Andrukonis, the company's former chief risk officer, warning him that Freddie Mac was financing risk-laden loans that threatened Freddie Mac's financial stability. In his memo, Mr. Andrukonis wrote that these loans "would likely pose an enormous financial and reputational risk to the company and the country". The article revealed that more than two-dozen high-ranking executives said that Mr. Syron had simply decided to ignore the warnings.
Other cautions came as early as 2001, when the late Federal Reserve governor Edward Gramlich warned of the risks posed by subprime mortgages. In September 2003, at a hearing of the House Financial Services Committee, Congressman Ron Paul identified the housing bubble and foretold the difficulties it would cause: "Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss."
The Economist magazine stated, "The worldwide rise in house prices is the biggest bubble in history", so any explanation needs to consider its global causes as well as those specific to the United States. The then Federal Reserve Board Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' ... it's hard not to see that there are a lot of local bubbles"; Greenspan admitted in 2007 that froth "was a euphemism for a bubble". In early 2006, President Bush said of the U.S. housing boom: "If houses get too expensive, people will stop buying them... Economies should cycle".
Predictions of no bubble
In 2008, Alex Tabarrok, a Canadian-American economist, rejected the notion that there was a housing bubble.The chief economist of Freddie Mac and the director of Joint Center for Housing Studies disputed the existence of a national housing bubble and expressed doubt that any significant decline in home prices was possible, citing consistently rising prices since the Great Depression, an anticipated increased demand from the Baby Boom generation, and healthy levels of employment. David Lereah, former chief economist of the National Association of Realtors, distributed "Anti-Bubble Reports" in August 2005 to "respond to the irresponsible bubble accusations made by your local media and local academics".
Price correction
On the basis of 2006 market data that were indicating a marked decline, including lower sales, rising inventories, falling median prices and increased foreclosure rates, some economists have concluded that the correction in the U.S. housing market began in 2006. A May 2006 Fortune magazine report on the US housing bubble states: "The great housing bubble has finally started to deflate... In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials."Among other statements, the reports stated that people "should be concerned that home prices are rising faster than family income", that "there is virtually no risk of a national housing price bubble based on the fundamental demand for housing and predictable economic factors", and that "a general slowing in the rate of price growth can be expected, but in many areas inventory shortages will persist and home prices are likely to continue to rise above historic norms". Following reports of rapid sales declines and price depreciation in August 2006, Lereah admitted that he expected "home prices to come down 5% nationally, more in some markets, less in others. And a few cities in Florida and California, where home prices soared to nose-bleed heights, could have 'hard landings'."
National home sales and prices both fell dramatically in March 2007 — the steepest plunge since the 1989 Savings and Loan crisis. According to NAR data, sales were down 13% to 482,000 from the peak of 554,000 in March 2006, and the national median price fell nearly 6% to $217,000 from a peak of $230,200 in July 2006.
John A. Kilpatrick from Greenfield Advisors was cited by Bloomberg News on June 14, 2007, on the linkage between increased foreclosures and localized housing price declines: "Living in an area with multiple foreclosures can result in a 10 percent to 20 percent decrease in property values". He went on to say, "In some cases that can wipe out the equity of homeowners or leave them owing more on their mortgage than the house is worth. The innocent houses that just happen to be sitting next to those properties are going to take a hit."
The US Senate Banking Committee held hearings on the housing bubble and related loan practices in 2006, titled "The Housing Bubble and its Implications for the Economy" and "Calculated Risk: Assessing Non-Traditional Mortgage Products". Following the collapse of the subprime mortgage industry in March 2007, Senator Chris Dodd, Chairman of the Banking Committee held hearings and asked executives from the top five subprime mortgage companies to testify and explain their lending practices. Dodd said that "predatory lending" had endangered home ownership for millions of people. In addition, Democratic senators such as Senator Charles Schumer of New York were already proposing a federal government bailout of subprime borrowers in order to save homeowners from losing their residences.