Dan Ariely

Is the Housing Market in a Bubble? Economics, Real Estate Value and the Crash (2007)

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• published: 27 Jun 2016
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The United States housing bubble was a real estate bubble affecting over half of U.S. states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012.[2] On December 30, 2008, the Case-Shiller home price index reported its largest price drop in its history.[3] The credit crisis resulting from the bursting of the housing bubble is—according to general consensus—the primary cause of the 2007–2009 recession in the United States.[4] 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 (CDO), mortgage, credit, hedge fund, and foreign bank markets.[5] In October 2007, the U.S. Secretary of the Treasury called the bursting housing bubble "the most significant risk to our economy."[6] Any collapse of the U.S. housing bubble has a direct impact not only on home valuations, but 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.[7][8][9][10] 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.[11] In 2008 alone, the United States government allocated over $900 billion to special loans and rescues related to the U.S. housing bubble, with over half going to Fannie Mae and Freddie Mac (both of which are government-sponsored enterprises) as well as the Federal Housing Administration.[12] On December 24, 2009, the Treasury Department made an unprecedented announcement that it would be providing Fannie Mae and Freddie Mac unlimited financial support for the next three years despite acknowledging losses in excess of $400 billion so far.[13] The Treasury has been criticized for encroaching on spending powers that are enumerated for Congress alone by the United States Constitution, and for violating limits imposed by the Housing and Economic Recovery Act of 2008. Business Week has featured predictions by financial analysts that the subprime mortgage market meltdown would result in earnings reductions for large Wall Street investment banks trading in mortgage-backed securities, especially Bear Stearns, Lehman Brothers, Goldman Sachs, Merrill Lynch, and Morgan Stanley.[94] The solvency of two troubled hedge funds managed by Bear Stearns was imperiled in June 2007 after Merrill Lynch sold off assets seized from the funds and three other banks closed out their positions with them. The Bear Stearns funds once had over $20 billion of assets, but lost billions of dollars on securities backed by subprime mortgages. Former U.S. Federal Reserve Board Chairman Alan Greenspan said "We had a bubble in housing",[34][35] 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." In 2001, Alan Greenspan dropped interest rates to a low 1% in order to jump the economy after the ".com" bubble. It was then bankers and other Wall Street firms started borrowing money due to its inexpensiveness.[36] 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. Freddie Mac CEO Richard Syron concluded, "We had a bubble",[37] 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.[37] Greenspan warned of "large double digit declines" in home values "larger than most people expect."[35] 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".[8] 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. https://en.wikipedia.org/wiki/United_States_housing_bubble