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BEFORE OUR VERY EYES
When the Federal Reserve cut interest rates early in the new century and mort-
gage rates fell, home refinancing surged, climbing from billion in to .
trillion in , allowing people to withdraw equity built up over previous decades
and to consume more, despite stagnant wages. Home sales volume started to in-
crease, and average home prices nationwide climbed, rising in eight years by one
measure and hitting a national high of , in early . Home prices in
many areas skyrocketed: prices increased nearly two and one-half times in Sacra-
mento, for example, in just five years, and shot up by about the same percentage in
Bakersfield, Miami, and Key West. Prices about doubled in more than metropol-
itan areas, including Phoenix, Atlantic City, Baltimore, Ft. Lauderdale, Los Angeles,
Poughkeepsie, San Diego, and West Palm Beach. Housing starts nationwide
climbed , from . million in to more than million in . Encouraged
by government policies, homeownership reached a record . in the spring of
, although it wouldn’t rise an inch further even as the mortgage machine kept
churning for another three years. By refinancing their homes, Americans extracted
. trillion in home equity between and , including billion in
alone, more than seven times the amount they took out in . Real estate specula-
tors and potential homeowners stood in line outside new subdivisions for a chance to
buy houses before the ground had even been broken. By the first half of , more
than one out of every ten home sales was to an investor, speculator, or someone buy-
ing a second home. Bigger was better, and even the structures themselves ballooned
in size; the floor area of an average new home grew by , to , square feet, in
the decade from to .
Money washed through the economy like water rushing through a broken dam.
Low interest rates and then foreign capital helped fuel the boom. Construction work-
ers, landscape architects, real estate agents, loan brokers, and appraisers profited on
Main Street, while investment bankers and traders on Wall Street moved even higher
on the American earnings pyramid and the share prices of the most aggressive finan-
cial service firms reached all-time highs. Homeowners pulled cash out of their
homes to send their kids to college, pay medical bills, install designer kitchens with
granite counters, take vacations, or launch new businesses. They also paid off credit
cards, even as personal debt rose nationally. Survey evidence shows that about of
homeowners pulled out cash to buy a vehicle and over spent the cash on a catch-
all category including tax payments, clothing, gifts, and living expenses. Renters
used new forms of loans to buy homes and to move to suburban subdivisions, erect-
ing swing sets in their backyards and enrolling their children in local schools.
In an interview with the Commission, Angelo Mozilo, the longtime CEO of
Countrywide Financial—a lender brought down by its risky mortgages—said that a
“gold rush” mentality overtook the country during these years, and that he was swept
up in it as well: “Housing prices were rising so rapidly—at a rate that I’d never seen in
my years in the business—that people, regular people, average people got caught
up in the mania of buying a house, and flipping it, making money. It was happening.
They buy a house, make , . . . and talk at a cocktail party about it. . . . Housing
suddenly went from being part of the American dream to house my family to settle
