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Summary: In this article we’ll cover the history of the U.S. housing market in detail, explaining the cause of the Great Depression through the Great Recession of 2008. We’ll also discuss how the Obama and Trump administrations impacted the housing market. 

Table of Contents

Introduction: History of the U.S. Housing Market

As you probably know, the overall health of a nation’s economy fluctuates over time. The United States has experienced several periods of economic decline over the years, each varying in severity. The two most infamous downturns were the Great Depression of the 1930s and the Great Recession in 2008. 

When the stock market crashed in 1929, the U.S. was thrown into The Great Depression. This global depression persisted for the next decade as millions of people lost their businesses, real estate and life savings. 

In large part, The Great Depression was triggered by big drops in foreign stock markets and people borrowing money from brokers to invest in stocks.

When the market eventually became over-leveraged, the bubble burst, the stock market tanked and the economy collapsed. 

The Dust Bowl during the 1930s made life even harder for the people living in the Southern Plains of the U.S. The states of Oklahoma, Texas, Kansas, New Mexico and Colorado experienced nearly a decade of drought and extreme dust storms. These severe conditions affected about one hundred million acres of land and killed crops, cattle and people. The Dust Bowl only added to the economic disaster that made up the “Dirty Thirties”. 

President Franklin D. Roosevelt’s “New Deal” aided in economic recovery, provided jobs and helped American’s get back on their feet. 

Over the next 60 years, the U.S. housing market and home prices continued to ebb and flow. In 1953, the median home price was around $18,000. Adjusted for inflation, the average home price would be just over $175,000 today. 

Historically, the value of homes has steadily increased over time. However, there have been periods of time when the value of homes decreased for various reasons. These periods of downturn usually happen every decade or so. 

The below graph does an excellent job of illustrating how average home prices have changed over time. Note that the grey areas in the graph indicate periods of economic recession.

Average Sales Price for Homes 1963-2020 according to FRED

Below is a chart showing housing starts from 1953 to 2020. Again, the grey areas indicate periods of recession. As you can clearly see, housing starts (the number of homes beginning to be built) drop during economic downturns and go up when the economy is strong.

Housing Starts Historical Chart 2020 Macrotrends

What Happened in to the U.S. Housing Market in 2008?

In an effort to help more Americans own real estate, mortgage lending standards loosened up in the early 2000’s. People with low credit scores were suddenly able to qualify for low-cost, low down-payment mortgages. These were known as subprime loans.

These subprime loans were then packaged together with high-quality loans and sold in bulk to institutional investors worldwide, marked with A+ ratings. Demand for these loan packages grew from investors around the globe, resulting in more and more foreign and domestic capital pouring into U.S. mortgage-backed securities. More money meant more loans to give out, and more creativity in how people could qualify for those loans. 

What Caused the Housing Market Crash in 2008 Infographic

Soon, borrowers could put no money down and even get cashback to pay for the furniture! There were interest-only loans, and then low and even no-documentation loans. Stated income loans required no back up for what was put on applications (today these are called ‘liar loans.” And finally, the “pick-a-pay” loan allowed borrowers to pick which payment they’d like to make that month – a 15 year, 30 year, or interest-only. 

The negative amortization loan became the most popular option, allowing borrowers to pay only a portion of the actual payment, with the balance of the payment added to the loan amount. A borrower could qualify for the loan based on this small “teaser” rate, vs the actual payment. How they would be able to make the full payment someday was not considered.

These loose lending standards brought in new home buyers by the millions, driving prices up. It also attracted lots of new real estate investors, who could qualify for unlimited mortgages on investment property with no money down and no income or asset verification. 

I was a mortgage broker at the time, and it was the wild, wild west for us. Mortgage bankers could make 1-3% of the loan amount, and anyone could become a loan broker. The barrier to entry was a real estate license, and some didn’t even bother to get that.

Basically, banks were giving loans to pretty much anyone that applied, whether a borrower could afford to pay back the loan or not. Debt-to-income ratios were completely disregarded. I even heard someone claim they were able to get a loan for their dog. These “straw” buyers were not that uncommon at the time, sadly. Fraud was rampant because oversight was lacking.

Eventually, the party had to end and those loans would have to be repaid. When the full payment was due, not surprisingly, millions of borrowers defaulted. It started with the subprime loans because they came first and reset first. Shortly after, prime borrowers started to default as well. As more and more foreclosures hit the market, prices tanked seemingly overnight. Builders offering new homes had no buyers and many went bankrupt, with their entire developments going to foreclosure.

Soon, strong borrowers found themselves in a pickle because they couldn’t refinance or sell their properties for the price they paid, and more properties went back to the bank or to short sales (selling for less than what’s owed on the mortgage with the bank taking the hit).

As more and more banks suffered and could no longer lend or collect on bad loans, they went out of business and lending dried up, further exacerbating the housing crash.

When Wall Street giant Lehman Brothers collapsed in September of 2008, the housing market officially crashed as well, and the U.S. economy, along with the rest of the world that invested in these mortgages, slid into the Great Recession in 2008. 

More than $16 trillion in net worth was lost and approximately 10 million people lost their homes. The stock market crashed as well, since so much of the nation’s economy is dependent on healthy banks and healthy real estate. Many baby boomers facing retirement discovered their nest egg was gone. They would have to start over. Their children, the millennials, were just graduating from college about that time, only to enter a job market with no jobs. 

It’s important to note that the housing market isn’t directly impacted by stock market fluctuations. The stock market, however, is highly affected by the housing market. The Great Depression was caused by the stock market crashing and the Great Recession was caused by the housing market crash. 

When the housing market crashed in 2008, the stock market crashed too. The U.S. housing market impacts far more than just the value of homes. It affected the world.

What's Been Happening to the Housing Market Since 2008

During the Great Recession, home prices dropped 33 percent. Surprisingly, 10 years later, the housing market had mostly recovered. Home values today are now up more than 50 percent since the recession. How? By unprecedented government stimulus. 

In an attempt to stop deflation, (or the further decline of prices), the Federal Reserve printed trillions of dollars and called it Quantitative Easing (QE). The big banks were able to borrow these funds at a 0% interest rate to start lending again. Interest rates dropped to historic lows. And the government even offered an $8000 tax credit for buying a home. 

It worked. More cheap money circulating means more people can borrow money to buy things – specifically real estate and stocks. And while the economy did come bouncing back, the issue with QE is that it often leads to higher inflation long-term because of the increase in the money supply. Inflation eats away at the value of the dollar, basically making the dollar worth less. That’s good for people who own assets that inflate. It’s not good for people who have to pay more for things. 

While the housing market recovered in the 2010s, the divide between the “haves” and the “have nots” increased as well. Plus, many people had to dig themselves out of foreclosure, and total financial loss.

How Obama's Presidency Impacted the U.S. Housing Market

President Obama took office in 2009, during the time when the value of homes was rapidly falling, unemployment rates were through the roof and banks were failing from the massive influx of foreclosures. The Obama administration’s goal was to keep the country from going into a full-blown depression. 

Policymakers didn’t have a lot of options to shore up the economy at the time. So rather than create a new department to try and solve the problem, the Troubled Asset Relief Program (TARP) mandated that funds from the US Treasury only be dispersed to financial institutions and not homeowners. TARP also required that the Treasury only operate within the existing financial infrastructure. 

As real estate values collapsed in many cities across the country, and most people were too scared or too broke to buy, brave real estate investors eventually started to come back into the market to buy these distressed assets with cash. About that time, Warren Buffet said in a CNBC interview that he’d buy a few hundred thousand homes if he had a way to manage them. 


That did it. Suddenly hedge funds from Wall Street paid attention and started buying foreclosures and putting them on the market as rentals. They figured out how to manage them. 

By 2012, there was a buying frenzy of home buyers competing against Wall Street. Home values increased. Negative equity, foreclosures, liquidity and insolvency started to reverse and head in a positive direction.   

The major lesson learned about the housing crisis during Obama’s presidency was how important it is to have a regulatory framework for lenders in order to avoid another mortgage meltdown. The Dodd–Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd–Frank) was enacted on July 21, 2010 in an effort to do just that.

Since lending standards have tightened, homeownership rates have gone down but so have mortgage defaults. Of those who lost their homes during the housing crisis of 2008, just 35 percent have bought another home. That’s a huge percentage of former homeowners who have not bought a house since losing theirs to a short sale or foreclosure.

How Trump's Presidency Has Impacted the U.S. Housing Market

When Trump was elected president in 2016, mortgage interest rates were 3.87% and the housing market was continuing to rebound. At the end of 2017, Trump signed the Tax Cuts and Jobs Act (TCJA), which changed the tax code tremendously and further stimulated the economy. 

TCJA included huge tax cuts to business income, investment profits, estate taxes, etc. This new law offered significant tax cuts for large corporations. Much of that money flowed into real estate. 

Demand for housing continued to grow over the last four years across the country, and home values continued to rise. However, the Federal Reserve did start to reverse its stimulus program and began to raise interest rates. At the end of 2018, home sales started to slow as rates increased.

President Trump wrestled with Jerome Powell, Chairman of the Federal Reserve, demanding that rates be lowered again. He even threatened to fire Powell. A few months later, the Fed reversed course again and lowered rates. Real estate and stocks responded with vigor. Sales picked up again as more people could afford to buy, and home values continued to rise.

Additionally, home builders were hit very hard during the Great Recession. Many went out of business or lost their credit lines. Most did not want to take big risks and chose to build on-demand vs on speculation. Regulations increased for development as well, slowing down new construction. 

Meanwhile, the U.S. population was growing, along with a demand for affordable housing. Unfortunately, with builder fees increasing along with supplies and labor costs, builders mainly focused on high-end luxury developments. Affordable housing was severely lacking, all the while demand was soaring.

This lack of affordable housing inventory combined with high demand has been a big contributor to rising home prices in that sector, and the trend seems to be continuing in 2020. 

There’s been rising demand from first-time millennial homebuyers, especially with declining interest rates. Additionally, “stay at home orders” to avoid the spread of the Coronavirus have more and more people wanting their own place with more space for homeschooling, working from home, cooking at home and entertaining at home. With the ability to work remotely, people who lived in high priced cities can now move to lower cost metros and suburbs, where they can afford to own a home.

Final Thoughts

History defines the present… Understanding the history of the housing market is crucial to understanding what the future may bring. Everything happens in cycles. What’s happened before will likely happen again, just in a different form. 

As a real estate investor it’s essential to be knowledgeable about the past so you can make best investment decisions for your future.

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