Real Estate Rewind | When All the Bubble Trouble Started

Real Estate Rewind

Real estate used to be what many regarded as their best investment.  A cash cow which could be used as a safety net in a time of financial need.  Wanna fund your kids college tuition by doing a cash out refi on your primary residence?  That was soooo 2004.  Fast forward to 2013 and we have a whole new normal.  Our homes are no longer overstuffed piggy banks, the availability of credit is reserved for those with a platinum credit score.  Millions of American homeowners are still underwater with their home values, and still millions of others can’t even afford to buy a home.

How the heck did all of this happen? Here is a brief timeline to explain what has been called the “Housing Crisis”, which not only continues to put a drag on the American economy, but has had a ripple effect on economies all over the world.

1997—The Taxpayer Relief Act of 1997 takes effect, giving a major tax break to people who sell their homes. This leads to a rush to buy second homes and investment properties.

1999—In reaction to the effects of the Taxpayer Relief Act  of 1997 two years earlier, Fannie Mae urges banks to give loans to those who would not qualify under “traditional” criteria.

2003—Congress passes the American Dream Down Payment Act to stimulate increased home ownership. The move is intended to assist about 40,000 families per year to better afford down payments on houses and closing costs.

2004—In response to all of the moves above, Americans buy homes at record rates. A full 70% of Americans move into the category of homeowners. Sellers make huge money as demand drives up prices.  Behind the scenes, all sorts of nefarious practices are taking place. Mortgage lenders are approving applicants who absolutely cannot afford the homes that they are buying. Real estate agents are encouraging people to buy who have no business buying a home. Savvy bank employees are rapidly taking out second mortgages for people who cannot qualify for enough money to buy a home with their first mortgage approved. In short, the American Dream becomes a reality for a huge swath of consumers who would never have previously qualified for a mortgage.  The reason for this mortgage mad rush, government manufactured faulty optimism and no-look stamps of approval by lenders and appraisers.  The mess was well under way!

2005—The beginning of the burst of the housing bubble. Nearly 850,000 homes are foreclosed as the families approved in 2004 and earlier cannot keep up with their payments.

2006—The second wave of the bubble’s burst, as 1.25 million homes are foreclosed, sales begin to stop cold and prices fall like a rock in a well, instantly leaving millions of new homeowners under water with their mortgages, where many still remain today. The construction industry also comes to a standstill and millions of jobs are cut or scaled back as industries feel the reverberations of the bubble’s break.

2007—Banks begin to reap the consequences of their shaky practices a couple of years earlier. As homes are foreclosed, banks stop making the money they were accustomed to, and they now hold homes which they cannot sell. Several mortgage companies go bankrupt or merge with other companies. Lehman Brothers is the most prominent name to fold. Housing prices drop by the greatest percentage since the Great Depression and a record 2.2 million homes are foreclosed!

2008—Home prices continue to sink, dropping 7.5% in just a few months, with the resulting fallout. 3.15 million homes are foreclosed and various states declare budget emergencies due to the ripple effects of the housing crisis.

2009—The crisis reaches a peak, as nearly 4 million homes are foreclosed and banks write off $31 billion in mortgages.

2010—The crisis eases a bit, with just under 2 million homes foreclosed and banks writing $8 billion off in mortgages.

Today, more than half of all Americans cannot afford to buy a home. Demand for home loans is down 25%. Nearly 4 million Americans are behind on their payments and face possible foreclosure.

There are, however, some signs of this crisis reaching an end point,with spring buying season upon us, values and sales have risen slightly in many areas. The construction industry has recovered to some degree, and families facing foreclosure have received billions of dollars in government assistance to help them stay in their homes.


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  1. Great post Jim. You’ve included a ton of important information for those looking to understand how and why the real estate bubble popped. I’m more and more convinced that anything the government touches will wind up going bust. It’s a sham.

  2. It’ll be interesting to see where home prices & buying will go in the near term. We have seen an uptick here in Omaha in both prices & houses selling quicker. Though, we were insulated from a good bit of the downturn.

    • Jim says:

      Yea John, and Omaha or most of Nebraska anyway has lower unemployment on its side. We have seen movement in Tennessee as well, maybe it’s just moving season and that is the real driving force. unprecedented Low interest rates help too!!

  3. We bought our house in 2006 right when the big burst was going on. We kept the price in a range we could easily afford, so we didn’t have to struggle. It worked for us, but now we are trying to sell and move to a better location and that is going to be difficult.

    • Jim says:

      That was wise Grayson, most people who bought in 2006 purchased more house than they could afford, you my friend were shrewd and intelligent with your purchase.

  4. krantcents says:

    I bought my home in 1997, so I avoided the mess. I think we should have seen this coming when no income verification loans started. Home prices were skyrocketing and everyone was trying to get into the action. In the stock market, when everyone is trying to get in , you should exit. I think it was true in the housing market too.

    • Jim says:

      Yep Krant that is typically the sure sign of a bubble, I call it the soccer mom effect! When they are talking about it in their social circles and when they began investing in rental property, that was a time that the market was set for a big correction!

  5. It’s amazing what really went down with the house bubble. I think in simple term people just got greedy and gave out bad loans and didn’t care about the consequences. Hopefully we have all learned our lesson.

  6. Jim, great post. I was the sales assistant to a highly successful mortgage rep from the beginning of 1999 until the end of 2003. We were uneducated in the areas of finance and government, and were a great team, conditioned by the company to believe that we were helping people achieve the dream of home ownership. What a train wreck. When I look back and think about how hard we worked to get people approved who had no business spending the kind of the money they were intent on spending on housing, it makes me sick and SO remorseful. The greediness in people that kicked in during that time period made us all the more eager to be “good” reps and please the customer. The whole situation was a perfect picture of what happens when people listen to the media too much. And then, like he always does, the piper came to be paid. It was my first real lesson in why we need to be more than skeptical of the hype. BTW, it was only a few short weeks ago that Yahoo finance ran an article talking about the “recovery” of the housing market and urging people to get quickly to the mortgage companies as standards were starting to loosen. I can only shake my head in disbelief.

    • Jim says:

      Yep, we are going down the same road again. A propped up stock market, and an unethical media is providing us with a wealth effect so people “feel” richer. Sad thing is we are poorer, go to the grocery store or the gas station and you will find out what the real cost of commodities are and the buying power that the dollar doesn’t have!

  7. Jim says:

    Thanks Grayson!


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