Page 486 - untitled

Peter J. Wallison 457

of U.S. housing policy—until the true costs became clear with the collapse of the
housing bubble in 2007. Th en an elaborate process of shift ing the blame began.

2. The Great Housing Bubble and Its Effects
Figure 1 below, based on the data of Robert J. Shiller, shows the dramatic
growth of the 1997-2007 housing bubble in the United States. By mid-2007, home
prices in the U.S. had increased substantially for ten years. Th e growth in real dollar
terms had been almost 90 percent, ten times greater than any other housing bubble
in modern times. As discussed below, there is good reason to believe that the 1997-
2007 bubble grew larger and extended longer in time than previous bubbles because
of the government’s housing policies, which artifi cially increased the demand for
housing by funneling more money into the housing market than would have been
available if traditional lending standards had been maintained and the government
had not promoted the growth of subprime lending.
Figure 1. Th e Bubble According to Shiller

Th at the 1997-2007 bubble lasted about twice as long as the prior housing
bubbles is signifi cant in itself. Mortgage quality declines as a housing bubble grows
and originators try to structure mortgages that will allow buyers to meet monthly
payments for more expensive homes; the fact that the most recent bubble was so
long-lived was an important element in its ultimate destructiveness when it defl ated.
Why did this bubble last so long? Housing bubbles defl ate when delinquencies and
defaults begin to appear in unusual numbers. Investors and creditors realize that the
risks of a collapse are mounting. One by one, investors cash in and leave. Eventually,
the bubble tops out, those who are still in the game run for the doors, and a defl ation
in prices sets in. Generally, in the past, this process took three or four years. In the
case of the most recent bubble, it took ten. Th e reason for this longevity is that one