There’s an old expression that George W. Bush once butchered. “Fool me once, shame on you. Fool me twice, shame on me.” This adage certainly applies to the biggest financial collapse in recent memory, the housing bubble. Most adults over the age of thirty vividly remember the consequences of the bubble and subsequent credit crisis. The fear of market contagion and the collapse of Lehman Brothers led then Treasury Secretary Hank Paulson to orchestrate a bail out of the country’s largest banks. Paulson created TARP, the Troubled Asset Relief Program, and the U.S. tax payer suddenly became responsible for the poor decisions of Wall Street businessmen. Although Americans have spent an exceptional amount of time focused on these crooks since the crisis, the real cause of the housing bubble seems to have been forgotten or purposely overlooked. Lucky for you, I still remember.
Back in late 90’s, the Clinton Administration wanted more people to be able to afford a home. The Federal Reserve, run by “The Maestro” Alan Greenspan, accommodated the goal by decreasing interest rates. Lax lending standards became the norm, and Fannie Mae and Freddie Mac guaranteed all mortgage loans. This provided defunct firms like Countrywide with the moral hazard it needed to make a mortgage to anyone who could fog a mirror. The practice picked up even more speed during the Bush years, and finally ended in collapse during the financial crisis of 2008.
During the mania, there were many indicators that there was a bubble brewing in the marketplace. A story of Las Vegas hairdresser purchasing multiple homes with interest only mortgages stands out as a glittering jewel of foolishness. Television shows like Flip This House persuaded Americans that anyone could become a real estate mogul in the new housing economy. Anecdotally, one of the worst students from my high school told me in 2005 that he found a job working for a mortgage broker. After the bubble burst, I swore that I would never be duped by such irrational exuberance again, and I would make sure to look for these contra-indicators in the future.
Well, they’re back! The house flipping shows are back in full force on HGTV with programs like Property Virgins and Flip or Flop. Interest only loans are back and other subprime loans have returned while banks try to scrape the bottom of the applicant barrel. Although I don’t personally know any fools working in the mortgage industry this time around, I still hear people saying that a house is a good investment. To that, I’ll borrow the words of W and say, “You’re not gonna fool me again.”