The Real Estate Crash of 2008

Abstract

The current population of the United States has grown up with what seemed to be a steady and reliable increase in value of homes. Owning one’s own home is one of the signs of a prosperous and successful culture. In the 1930s, many people lost title to their homes during one of the greatest failures of human economic systems known. In response, banks and mortgage lending were regulated, bank deposits insured up to a level covering what most people had, and stock-trading practices ostensibly controlled. True, very old people could remember a time when the price of housing dropped, but with the inevitable passage of life with time, this group grew smaller and smaller, and older and older, and less relevant. There also were anomalies in local areas where, for whatever reason, home prices might negatively fluctuate. Reinhart and Rogoff have described five such anomalies, all associated with banking crises (Spain in 1977, Norway in 1987, Finland and Sweden in 1991, and Japan in 1992).¹ But house price decline occurred very rarely, and nobody really noticed.