When Bubbles Burst
An October 2007 report by the U.S. Congress's Joint Economic Committee predicted that there would be two million foreclosures on subprime mortgages by the end of 2008. Yet from the early 1980s right through 2005, there seemed to be no possible misstep in making a move in real estate. Doubledigit gains in housing prices were common throughout the mid- to late-1990s. Much like the stock market boom on the eve of 2000, people saw no way they could lose.
By 2004, a new investment fad had emerged to take the place of the stock market frenzy that fizzled — real estate. At that point, investors with little or no knowledge were taking out increasingly risky loans with little or no money down to purchase properties for their primary residence or for investment purposes.
In the latter case, these flippers would find quick financing to buy the properties, fix them up fast, and set them back on the market within days or weeks for a speedy sale. The choreography had to be precise, but at that moment, properties were selling fast, so everyone looked smart.
When is a loan predatory? There are many factors, but watch the reset dates, the fees, and particularly the points. If someone is trying to push you into a loan where you pay more than 2 points, be suspicious and see if you can find something better.
In various sections of the country, the party continued. In others, the bubbles were getting bigger and bigger… until they popped. There actually is no such thing as a universal housing bubble in the United States. In fact, average home prices have not declined
Yet a significant part of the mortgage industry was facing a crisis as this book was being written. Foreclosures were at record levels, and high single-digit gains all but vanished in key areas of the country. As the following chart shows, the market's fever had clearly broken between 2005 and 2007, and projections for 2008 were very conservative.
Perhaps the solution to many of our nation's lending problems is for individuals to start thinking about money the way they were at least thirty years ago — with an emphasis more on spending and savings control than debt and a reliance on rising equity for personal wealth.
