The Money Compass: Where Your Money Went and How to Get It Back

Chapter 3

Drop the “U” Out of “Housing” and You Get What America Got

The only real mistake is the one from which we learn nothing.

John Powell

We had a bubble in housing. I really didn’t get it until very late in 2005 and 2006.

—Alan Greenspan

I remember a morning in early March 2006 as if it were yesterday—because my first thought of the day was that if I lost my home, I couldn’t afford to buy it back.

By now, many U.S. homeowners have experienced that fear and seen it become a reality. The number of “underwater” homeowners grew by about 400,000 during the fourth quarter of 2011, to 11.1 million, as home prices fell as a result of seasonal declines and a slowdown in processing homes through the foreclosure process. According to data aggregator CoreLogic, 22.8 percent of all residential properties with a mortgage had negative equity.

Back in 2006, however, the U.S. housing market was on a tear. President George W. Bush’s 2004 campaign slogan “the ownership society” encouraged Americans to own homes. That became easier in the wake of the recession caused by the dot-come bubble bursting in 2000. The U.S. Federal Reserve Board (Fed) dramatically lowered the federal funds rate, from about 6.5 percent to 1 percent over a three-year period, spurring easy credit for banks and low-interest mortgage rates.

As more and more Americans entered the housing market, home prices skyrocketed, peaking in March 2006. Americans, meanwhile, just couldn’t conceive of the possibility that the housing ...