“The unusual price pattern, with prices rising at an increasing rate, was already well entrenched before the widespread adoption of alternative mortgage products…such as adjustable rate mortgages, interest-only mortgages, negative equity mortgages…
…and before derivative “insurance” had become prominent markers of the greatest of all national housing bubbles. Hence the bubble was exhibiting clear evidences of the presence of price momentum…buying in proportion to price increases….in the years before the mortgage market’s structural features had become prominent; before the Fannie Mae and Freddie Mac scandals of 2003 and 2004; and before 2005 when 45 percent of first-time home buyers paid no money down. This momentum-driven acceleration in home prices was therefore part of the expectations environment before radical changes in the mortgage market that subsequently dominated so much of both media and professional comment.
Throughout the entire period of 1997-2006, aggregate inflation-adjusted real estate equity….the primary source of net real wealth for most households….more than doubled, to about $13 trillion. The ensuing collapse in real estate values in 2007 against fixed mortgage debt continued until Q4 2011, with devastating consequences for real estate equity: In Q4 2011, households’ inflation-adjusted real estate equity reached its post-bubble minimum of $5.6 trillion, which was identical to its level in Q2 1985, more than twenty-six years earlier! These movements were reflected in the national income accounts in the form of rising expenditures on new home construction that reached a peak in Q1 2006 seven quarters before the recession began in Q4 2007. All other components of GDP had been steady or increasing, reversing course only after the recession began…a lag consistent with the “surprise” character of the Great Recession for consumers and businesses as much as for the “blindsided” policy makers (see Figure 3.8). Only the collapse in 1929 into the Great Depression was comparable.”
(Excerpt from 2014’s “Rethinking Housing Bubbles”, by Steven D. Gjerstad and Vernon L. Smith. Mr. Gjerstad is a Presidential Fellow at Chapman University and has a Ph.D. in economics from the University of Minnesota. Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments in the Argyros School of Business and Economics and the School of Law at Chapman University, and he is part of a team that created and runs the Economics Science Institute there.)
“In other words, the U.S. housing bubble was not caused by mortgage lenders and alternative mortgage products, as many incorrectly believe. As I have said many times before on this blog, it makes no sense that alternative mortgage products and securitization were the cause, when numerous foreign countries that also experienced housing bubbles and busts didn’t have these types of products or securities.”, Mike Perry, former Chairman and CEO, IndyMac Bank