But still, looking at the market cycle has to be instructive. In an impressive new book, “The Great American Housing Bubble,” Adam Levitin of Georgetown University and Susan Wachter of the Wharton School summarized six possible causes of that epic boom-and-bust cycle. Succinctly put, they are:
A global savings glut — excessive saving worldwide, given available investment opportunities, a theory proposed by Ben S. Bernanke, the former Fed chairman, in explanation of low interest rates in the early 2000s.
All these factors, as well as Federal Reserve decisions affecting mortgage rates, are part of the story of the 1997 to 2012 boom and crash. So are the difficulties faced by the Fed and other regulators, as described in a new and imposing 595-page volume, “First Responders,” edited by Mr. Bernanke and two former U.S. treasury secretaries, Timothy Geithner and Henry Paulson.
All of the theories point to a fragile boom-time mind-set that underestimated home price risk, whether by home buyers, investors, mortgage originators, securitizers, rating agencies or regulators.
So let us dig a little deeper. What caused all these errors back then?
Ultimately, it came down to unwarranted optimism and excitement about home prices. There were, during the 1997-2005 boom, constellations of narratives about housing that grew contagious over time, even transcending national borders. Intense “real estate voyeurism” — envious online snooping of other peoples’ home values — became common. The exuberant mind-set displaced thoughts of price declines.
Stories abounded of “flippers,” people who made fantastic profits buying, fixing up, and selling homes within a matter of months. The so-called experts in those days hardly ever mentioned that the high rate of increase in home prices might one day be reversed.
In retrospect, it appears that there was a political component to the housing craze. President George W. Bush said the United States was becoming an “ownership society” in his successful 2004 re-election campaign. He promoted the idea of homeownership in a way that flattered the apparent wisdom of people who bought houses.
Newspaper articles shortly after Mr. Bush won became much more comfortable with the idea that something akin to an “ownership society” was the country’s future, part of a longer trend that defined the “American dream” as owning a home. In that atmosphere, people rarely even considered the possibility that home prices could ever fall.
Starting just before the 2005 peak, however, the news media started discussing a new idea, the existence of a “housing bubble” for single-family homes, whose prices had become obviously high. Before that, there just wasn’t much talk about the idea that a bubble could be forming in the market for single-family homes. That sudden change is worth remembering. It is a model for what might happen again one day.