Max Gladwell

A series that reflects on the big topics and trends from the first decade of the 21st Century.

We’re big fans of history, as there is so much to learn from it. This is the first in a series of posts that will look back on the past decade from 2000 – 2010. Each may not have specific relevance for social media or sustainability, but the big topics of the housing bubble, the Bush Era, the dotcom bust and the rise of the Millennial Generation provided the broader context from which social media was born and the new era of sustainability emerged.

The Housing Bubble

There was so much wrong with the housing market we hardly know where to begin. First, you had a flood of a cheap money thanks to China’s cash surplus, the securitization of mortgages, and the Fed’s unprecedented interest-rate cuts. Investors were seeking new opportunities following the dotcom bust, and real estate was considered safe if not sexy. Mortgage lending got creative with no-money-down loans and low teaser rates. Plus, you could cheapen your payments by opting for interest-only or negative amortization, where you pay less than the interest and the balance is added to the principle. On top of that, lending standards were non-existent.

Next, you had all of the players involved in pumping the housing market: Wall Street, mortgage brokers, real estate brokers, credit rating agencies, home builders, appraisers, and the media (advertising and editorial). This housing cabal single-handedly propped up our economy. Topping it off, you had the key assumption that housing prices wouldn’t (couldn’t) go down.

Any reasonable person observing all of this could see what was happening and where it was headed. The fundamentals that historically drove up housing prices were non-existent. It wasn’t a function of population growth or rising incomes. And though it appeared like a function of supply and demand, the demand was artificially created by all of the free money. Housing prices were going up. But housing values pretty much stayed the same or quite possibly went down given the rapid increase of supply and stagnant income levels.

It certainly didn’t take a Yale economist to piece together this bubble in the making. We had unprecedented access to credit—to free money. Each of us was put in a position to bid up the price of a home well beyond what we could afford by any measure of affordability and with little or no money down i.e. no risk. All the while comforted in the belief that the price was only going higher because that’s what it always did. Multiply this scenario millions of times, and it’s no surprise how trillions of dollars in “wealth” evaporated.

How could we have been so stupid? The answer is that we were acting rationally, as we are supposed to. Given the atmosphere of the housing market during this time and the balance of incentives vs. disincentives, everyone pretty much behaved exactly as they should have i.e. in their rational self interest. And therein lies the problem. A system was created that guided rationally behaving individuals toward a collective crisis and downfall. Short-term personal gains came at the expense of long-term prosperity and well-being as a society.

This isn’t to suggest that collectivism is preferable to individualism or that people should be any less responsible for themselves. Those responsible should be held accountable, though that’s a topic for another discussion. The point is that we created a system that lead quite naturally and predictably to its own collapse. This is why free societies have established and enforceable laws and regulations: to save us from ourselves. If a single piece of this disastrous equation had been altered, such as a mandatory 20% down-payment to secure a mortgage, it all could have been avoided because the presence of risk would have better guided our individual actions.

In the end, it’s quite possible that housing prices reached an inflation-adjusted peak that will never again be realized because the perfect storm of factors that created this mess will never again conspire in the same way. We’re confident prices will continue to drop in the coming years, as there are no fundamentals to support them, least of all widespread employment or demographic trends. The federal government is doing all it can to prop up prices with tax credits and low interest rates, but this is simply prolonging the inevitable—the inevitable bottom, which probably isn’t far from where housing prices were at the start of this decade.

As a result, it’s quite possible the past decade fundamentally altered the nature of the American Dream. It can be argued that home ownership is no longer part of that fabled ideal because it simply doesn’t make financial sense to invest in a house.

Update: A couple days after we posted this reflection on the great housing bubble of the past decade, CNN Money reports the following: “Taking into account inflation, home prices are actually lower than they were 10 years ago, according to a report from the National Association of Realtors.” And then this article points to three reasons housing prices are still headed lower. So if you’re thinking about buying a house, you have to ask yourself whether it’s because of social pressure to participate in the American Dream or because it’s a sound financial decision. Owning a house is no more a part of the American Dream than filing for bankruptcy or getting audited by the IRS.

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