A Blast from the Past
For the last several weeks, I've been deeply immersed in writing and editing DMI's annual Year in Review. As part of the process, I've spent some time looking back over past editions, and stumbled across the following from DMI's 2005 Year in Review:
HOUSING BOOM: Housing was the engine of the American economy in 2005, but our disproportionate reliance on this sector may have set the nation up for a dangerous economic situation. This year construction surged, real estate profits swelled and cities reaped a property tax windfall. Fueled by low mortgage rates, housing prices nationwide soared 13 percent in the 12 months preceding June 2005, near the peak of the real estate boom that had seen inflation-adjusted home prices increase 55 percent since 1997. Even Alan Greenspan warned of “froth” in housing markets. As prices soared, a growing number of Americans found they could not afford a home unless they assumed risky adjustable-rate and interest-only mortgages. Those who already owned homes led a surge in refinancing as millions of households, squeezed by higher prices and stagnant wages, borrowed against their equity to meet basic living expenses. As the year wrapped up, mortgage rates inched higher, construction slowed and housing sales cooled. If the boom was actually a bubble beginning to burst, the steep drop in housing prices would leave many homeowners owing more on their mortgages than their homes were worth. This would put families at risk of losing their biggest asset and lenders at risk of mass default. Meanwhile a dramatic drop in construction, housing finance and real estate sales could push the economy into recession, throwing millions out of work. What a way to wake up from the American Dream.
In retrospect, we called the peak - and bursting -- of the housing bubble early. Still, the description of the economic tribulations we now face is chilling. And if we saw it coming, why didn't all those highly-paid Wall Street investors? And government regulators?