It’s 2018.
I don’t expect that to come as some sort of revelation to you, as you’ve been writing that on your checks since January 1 of this year (or a few weeks after that, if you’re like me!). But the fact that it’s 2018 is relevant if we consider that it’s been exactly ten years since 2008, which was a seminal time in the world of any real estate agent, lender, or homeowner – and not for a positive reason.
For those of us who recall, 2008 was when we saw the housing market first lean and then completely fall off a sheer cliff.
Over the ensuing months and years, we saw not only the mortgage, real estate, and housing market completely crumble, but fault lines in the bedrock of our whole economic system. From Wall Street to Main Street and definitely for every homeowner, there really weren’t many people in America who weren’t negatively impacted by the Crash of ’08 and subsequent Great Recession.
For those of us who were making a living selling real estate or home loans, the feeling at the time is best described as showing up to work every day only to be punched in the gut. And it only got worse the next day. And the next day.
Thank goodness, we’ve certainly come a long way from those dark days in the ten years since.
So, to both remember, celebrate, and serve as a reminder of caution, let’s take a look back at the state of housing and the economy circa 2008 :
Surely, it’s hard to forget that it was only five days after Christmas of 2008 – on December 30, that the Case–Shiller home price index had suffered the largest drop in its history.
But there was a long lead-up to get there, with many warning signs that were largely ignored.
The core problem that led to the mortgage meltdown and housing bubble pop goes further back. Flipping our calendars five years earlier, to 2003, we see that iconic investment guru Warren Buffett warned us that a booming “exotic” financial instrument called credit default swaps were “financial weapons of mass destruction.”
Of course, these credit default swaps started out as a shrewd insurance play, as they were policies that essentially covered the losses of mortgage-holders in case they defaulted. For the traders and companies making countless millions of dollars, it seemed like easy money at the time and led to a massive trading market and a run-up of rampant speculation.
Banks couldn’t lend money fast enough, offering risky stated income, no income, no documentation, and no-money-down loans that routinely became ludicrous. Buyers couldn’t pick up houses fast enough, sometimes buying multiple rental properties that were nowhere near cash flowing, but seemed like a good idea since they had to invest little or nothing and appreciation was still skyrocketing.
Homeowners looked to cash in on this modern Gold Rush, buying and selling homes with huge profits, or refinancing to take massive amounts of cash equity out of their homes. More people than ever were buying more houses, new cars, boats, vacations, timeshares, and living high off their equity than ever before. But no one was blameless, as predatory real estate agents, lenders, and housing scammers all joined in the money-grab.
However, the situation was untenable, a wobbly house of cards that was built so high, the foundation was no longer in sight.
And then, it fall fell down.
In August of 2007, Yale University economist Robert Shiller rang the alarm bells in a speech when he said, “The examples we have of past cycles indicate that major declines in real home prices—even 50 percent declines in some places—are entirely possible going forward from today or from the not-too-distant future.”
In October of that same year, U.S. Secretary of the Treasury called the housing bubble “the most significant risk to our economy.”
Increased foreclosure rates in 2006–2007 among U.S. homeowners led to a crisis in August 2008 for the subprime, Alt-A, collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets.
In and around 2008 we saw the frighteningly quick collapse of financial institutions, starting with the sub-prime lenders, then Alt-A mortgage, lenders, collateralized debt obligations (CDO’s), hedge funds, foreign markets and then some of the country’s oldest and staunchest investment banks.
The tipping point that started dropping all of the dominoes seemed to be when New Century Financial, the largest subprime lender in the nation, started faltering in early 2007. New Century’s stock fell a precipitous 84% with news of a Justice Department investigation into their shady lending practices and cooked books. By early April 2007, New Century had filed Chapter 11 bankruptcy with losses well over $100 million.
Before we could even process the failure of one bank or institution, it seemed that two more were forced to close their doors. In all, 25 subprime lenders ended up declaring bankruptcy, were absorbed in a sale, or suffered catastrophic financial losses.
Already by January of 2008, Countrywide Financial, which was America’s largest mortgage lender, was facing bankruptcy and forced to sell to Bank of America. With hundreds of thousands of defaulting mortgages on their books, B of A was able to envelop the former mortgage giant for pennies on the dollar.
By March, the mortgage crisis was no longer confined to mortgages – or real estate. It was then that Wall Street investment stalwart Bear Stearns was bought out by JP Morgan Chase, saving the former from bankruptcy since its portfolio was so heavy with mortgage-backed securities. JP Morgan consummated the sale at only $10 per share for Bear Stearns, with the U.S. Federal Reserve stepping in to alleviate $30 billion of Bear Stearn’s fledgling assets.
The “Too big to fail” axiom was no longer parroted around the offices, water coolers, and bars of America, as exactly that had just happened.
Next to sink on September 14 was Merrill Lynch, whose iconic “bullish on America” slogan was now a symbol of the seemingly-bottomless crisis. They, too, sold to Bank of America to save themselves from dissolution, at the discount price of $50 billion, or 50% of their market value less than a year previously.
To try to bail out the sinking ship, the U.S. government allocated over $900 billion in special rescue loan packages in 2008 alone. Those “bailout” loans were offered to both public and private sector institutions, including Fannie Mae, Freddie Mac, and the Federal Housing Administration to keep them from collapsing.
When would the financial free fall stop?
Perhaps one early sign of renewed common sense over desperation was when the Lehman Brothers investment firm was going under. Unable to find a buyer like Merrill Lynch or Bear Stearns, the government also denied them a huge bailout. Lehman Brothers filed for bankruptcy the very day after Merrill Lynch consummated their own sale to B of A.
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We’ve covered a lot here, but to do it justice, there’s a lot more to explore about 2008’s real estate, mortgage, and housing collapse. Look for part two of this blog series coming soon!