The reasons behind the recently ended boom in housing prices weren't a huge mystery. Even with the dot-com crash, the U.S. has only had a few recessionary quarters since 1991. No wonder former Fed chief Alan Greenspan is talking about a return to "normal" business cycles.
A lot of money came out of the stock market after the crash, and much of it ended up in housing. Low mortgage rates and rapidly rising prices got people excited, and before long, regrettable things like aggressive subprime loans and house flipping came into the picture. Yuck.
Now there's just one question: How drastic will the housing bust be? Though it's all interconnected, it's not necessarily going to play out the same way for big banks like Wells Fargo (NYSE:WFC), subprime lenders like Fremont General (NYSE:FMT), homebuilders like KB Home (NYSE:KBH), investment banks like Bear Stearns (NYSE:BSC), and slick Sam the speculator who was going to make real estate riches in Miami.
Then, of course, there's Mr. Average Joe, who owns a primary residence and possibly some equity investments.
Some argue that home prices will just flatten out, instead of actually falling. Their reasoning seems to be that home prices have never fallen in the U.S. before -- not exactly something I can keep under my pillow to help me feel safe at night, if you know what I mean. It's kind of like saying there will never be a major global nuclear war because there's never been one before. That doesn't make me any more comfortable with certain countries possessing nuclear arms.
If you believe many of the voices out there decrying the housing market -- a group that includes Yale's Robert Schiller, who wrote "Irrational Exuberance" -- a flattening-out of real estate price growth may be a godsend. More disastrous consequences could follow, though. As an article in The Economist pointed out back in mid-2005, prices in a handful of global real estate markets (the U.S. included) have risen faster and higher than the run-up Japan saw in the '80s. The result of that bubble? Property prices in Japan spent 14 years falling, shedding 40% of their peak value.
I'd be pretty psyched if this didn't come to pass, but I have to admit that a lot of the evidence is pretty compelling.
Thoughts, fears, revelations? Bring them here.
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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can visit Matt on the Fool's CAPS service here, or check out his blog here. The Fool's disclosure policy has never crashed and never will. We promise.
