US Housing Bubble (2008)
When "home prices never fall nationally" became consensus
Peak Value
Case-Shiller Index: 206
Crash Value
Case-Shiller Index: 134
Duration
68 months
Overview
The US housing bubble (2002-2008) and subsequent financial crisis represented the worst economic collapse since the Great Depression. Home prices rose approximately 124% from 1997 to their peak in 2006, fueled by loose lending standards, complex financial instruments, and widespread belief that housing was a risk-free investment. When the bubble burst, it triggered a global financial crisis, required massive government intervention, and led to millions of foreclosures and job losses.
Timeline
**2002-2004: Stealth Phase** - Federal Reserve cuts rates after dot-com crash - Mortgage lending standards begin loosening - Subprime lending grows but stays under radar **2005-2006: Awareness & Mania** - House "flipping" becomes popular - TV shows celebrate real estate speculation - Mortgage products become increasingly exotic - Housing prices peak in early 2006 **2007: Cracks Appear** - Subprime lenders begin failing - Bear Stearns hedge funds collapse - Early mortgage delinquencies rise **2008: Crisis** - Bear Stearns fails (March) - Fannie Mae and Freddie Mac seized (September) - Lehman Brothers bankruptcy (September 15) - AIG bailout and market collapse **2009-2012: Aftermath** - Home prices fall 33% from peak - Millions of foreclosures - Unemployment peaks at 10% - Slow, painful recovery begins
The Narrative
"Home prices never fall nationally." This single belief, repeated by Fed officials, economists, and real estate professionals, underpinned the entire bubble. It justified lending to anyone with a pulse, creating complex mortgage securities rated as safe, and homeowners treating their homes as ATMs. The narrative extended to: "Real estate is the best investment"; "Everyone should own a home"; "Prices will keep rising, so buy now or be priced out forever."
Warning Signs
- No-documentation "liar loans" becoming standard
- Mortgage fraud becoming endemic
- Home prices rising 10-20% annually
- Exotic mortgages (ARMs, option ARMs, negative amortization)
- Real estate speculation shows on TV
- Rating agencies giving AAA to subprime securities
- First-time flippers making quick profits
- Home equity being spent on consumption
Who Benefited
**Wall Street:** Record bonuses 2003-2006; some firms collapsed, others bailed out **Rating Agencies:** Collected fees for favorable ratings **Mortgage Originators:** Made money on volume, not quality **Short Sellers:** Made fortunes betting against housing
Who Lost
**Homeowners:** Millions lost homes to foreclosure **Workers:** 8.7 million jobs lost in recession **Retirees:** Portfolios devastated, plans delayed **Taxpayers:** $700 billion TARP bailout (largely repaid)
Lessons Learned
1. "Prices never fall" is always false—every asset can decline 2. Complexity can hide risk—even from professionals 3. Leverage transforms corrections into crises 4. Rating agencies have conflicts of interest 5. When everyone owns an asset, there's no one left to buy 6. Government policy shapes bubbles through incentives
Current housing market dynamics differ: tighter lending, lower leverage, and housing supply constraints are real. However, elevated prices and speculation in some markets warrant attention.