Q Q

Sources: Inside Mortgage Finance, S&P, Milken Institute.

Note: Home mortgage originations for Q1-Q3 2008 are annualized.

declined once again to $3.0 trillion in 2006 and still further to $2.4 trillion in 2007 as the mortgage market meltdown occurred. In the first three quarters of 2008, originations totaled only $490 billion, $445 billion, and $300 billion, respectively. During the surge in home mortgage originations, some lenders began soliciting hard for new loans and relaxing their underwriting standards to keep the party going.

Accompanying the surge in home mortgage originations was, of course, a corresponding surge in home prices in the early and mid-2000s. Home mortgage originations shot up by 276 percent from 2000 to 2003, and home prices increased by 41 percent over the same period, as shown in Figure 2.27. This thriving market also pushed homeownership to a new high, as shown in Figure 2.28.

Home prices can be tracked by using different indices or concentrating on different geographical regions. Figure 2.29 shows that the annual growth rate of prices from January 1987 to December 2006 was 5.16 percent, based on the national home price index from the Office of Federal Housing Enterprise Oversight (OFHEO), and 6.52 percent, based on S&P/Case-Shiller's 10-metro composite home price index (see Appendix Table A.16 for a discussion of the differences in these two indices). Regardless of the measurement used, from 2000 to 2006 most of the arrows were pointing in one direction: straight up.

Figure 2.28 Home Price Bubble and Homeownership Climb (1990-Q2 2008)

Percentage Percentage change from previous year

Figure 2.28 Home Price Bubble and Homeownership Climb (1990-Q2 2008)

Percentage Percentage change from previous year

Sources: S&P/Case-Shiller, OFHEO, Milken Institute.

While home prices rose steadily across most of the nation, they were absolutely skyrocketing in certain hot markets. Appendix Table A.17 tracks prices in the 20 individual metropolitan statistical areas covered by S&P/Case-Shiller's home price index. It shows that from 2000 to 2006, Miami posted an average annual home price increase of 17.1 percent. During that same period, prices in Los Angeles rose by an average of 16.1 percent per year, while in Las Vegas, the average annual jump was 14.0 percent. At the height of the boom, bidding wars often broke out between buyers in these markets, and many sellers closed deals well above their initial asking prices. Desirable properties might be snapped up at their first showings.

But what goes up must come down, and that was especially true in the most overheated markets. From August 2007 to August 2008, prices in Miami, Los Angeles, and Las Vegas plummeted by 28.1 percent, 26.7 percent, and 30.6 percent, respectively. Figure 2.29 also shows that home prices collapsed after 2006.

Not surprisingly, the surge in home mortgage originations indicated briskly rising home sales. Both new and existing homes saw record-high sales in the fall of 2005 (see Figure 2.30). New developments sprouted around the nation as home builders raced to keep up with demand. But

Figure 2.29 Home Price Bubble Peaks in 2006 (Monthly, January 1987-September 2008)

Index, January 1987 = 100

Index, January 1987 = 100

Figure 2.29 Home Price Bubble Peaks in 2006 (Monthly, January 1987-September 2008)

Home Price Bubble Peaks 2006

Sources: Office of Federal Housing Enterprise Oversight, S&P, California Association of Realtors, Moody's Economy.com, Milken Institute.

Figure 2.30 Home Sales Peaked in Fall 2005, Then Plummeted (Monthly, 1968-September 2008)

Millions

Millions

New home sales (right axis)

Figure 2.30 Home Sales Peaked in Fall 2005, Then Plummeted (Monthly, 1968-September 2008)

New home sales (right axis)

Existing home sales: 4,620,000 New home sales: 464,000

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

Sources: U.S. Census Bureau, National Association of Realtors, Moody's Economy.com, Milken Institute.

as the chart indicates, the bursting of the bubble led to a plunge in sales of both new and existing homes.

Steadily rising prices and home sales had kept the housing market aloft for quite some time, but once the reversal began, it set a chain reaction in motion. Those who bought their homes near the end of the boom suddenly found that their properties were not worth what they paid. Borrowers could not rely on market conditions to keep increasing their equity—and many found themselves with ARMs they could not refinance.

The subprime market was the first area to show cracks in the foundation. In Chapter 3, we will examine how subprime lending grew, how it melted down, and why tremors in this one particular market ultimately sent shock waves through the entire financial system.

First Time Home Buyers Guide

First Time Home Buyers Guide

If you are getting ready to purchase your first home or if you think you can't afford to purchase your first home, don't make another move until you have read this important information! Every year, Federal, State and Local government and community development programs help thousands of people obtain there first home.

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