What caused the housing bubble

What caused the housing bubble February 3, 2015

The collapse of the housing market a few years ago was caused, reportedly, by predatory lending practices on people who couldn’t really afford to buy a house, coupled with shady investment instruments from the world of high finance.  But a new study is questioning that conventional wisdom.  Most of the people with bad loans turn out to be middle class and high income folks, with very few poor people involved.   The real problem, as Robert Samuelson reports, was unbridled optimism from virtually everyone in the housing industry that home prices would continue to go up forever.

From Robert Samuelson: Challenging what we know about the housing bubble – The Washington Post:

During the housing boom, there was a widespread belief that home prices could go in only one direction: up. If this were so, the risks of borrowing and lending against housing were negligible. Home buyers could enjoy spacious new digs as their wealth grew. Lenders were protected. The collateral would always be worth more tomorrow than today. Borrowers who couldn’t make their payments could refinance on better terms or sell.

This mind-set fanned the demand for ever bigger homes, creating a permissive mortgage market that — for some — crossed the line into unethical or illegal behavior. Countless mistakes followed. One example: The Washington Post recently reported that, in the early 2000s, many middle-class black families took out huge mortgages, sometimes of $1 million, to buy homes now worth much less. These are upper-middle-class households, not the poor. . . .

The matter is harder if the deeper cause was bubble psychology. It arose from years of economic expansion, beginning in the 1980s, that lulled people into faith in a placid future. They imagined what they wanted: perpetual prosperity. After the brutal Great Recession, this won’t soon repeat itself. But are we forever insulated from bubble psychology? Doubtful.

Read the whole article for the specific evidence Samuelson cites about what caused the housing collapse.

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