U.S. Housing Market in 2008

The U.S. housing market broke in 2008. Lehman Brothers failed in September; new-home sales collapsed to 485,000 (down 62% from 2005); and existing sales fell to 4.13M, beginning the steepest housing recession since the 1930s.

By year-end, foreclosure starts had reached 2.3M — three times the 2006 rate. The first wave of subprime resets had cascaded through the mortgage-backed securities system; AIG, Fannie Mae, and Freddie Mac were placed in conservatorship. The 30-year fixed dropped to 6.03% by year-end and would fall further in 2009 as the Fed initiated zero-interest-rate policy. Median existing-home prices fell from $217,900 in 2007 to $196,600 in 2008 — and would fall further to $166,200 by 2011 before the recovery began.

Macroeconomic Context

The financial crisis that had been building for two years reached its catastrophic climax in September 2008. Lehman Brothers — the fourth-largest U.S. investment bank — filed for bankruptcy on September 15, triggering a global financial panic that froze credit markets, collapsed the commercial paper market, and threatened the solvency of institutions from money-market funds to insurance giants. The government was forced to seize mortgage giants Fannie Mae and Freddie Mac in early September and bail out AIG days after Lehman's collapse. Congress passed the $700 billion Troubled Asset Relief Program (TARP) in October after an initial failed vote that sent markets into freefall.

GDP contracted in three of the four quarters of 2008, with the full-year figure showing a decline of roughly 0.1 percent — masking a second-half collapse of extraordinary severity. Consumer price inflation peaked at nearly 5.6 percent in the middle of the year before oil's price crash reversed the trend; by December, CPI was actually negative on a monthly basis. Unemployment, which began the year near 5 percent, ended it above 7 percent and was accelerating. The Federal Reserve cut the federal funds rate to essentially zero in December — a level it would not leave for seven years.

Housing prices fell in every market. The S&P/Case-Shiller National Index declined over 18 percent from its peak on a peak-to-trough basis in this period, with some Sun Belt metros experiencing 40 to 50 percent declines. Foreclosures surged to record levels. New-home construction collapsed to its lowest volume since World War II record-keeping began. The entire ecosystem of mortgage finance — originators, servicers, investment banks, rating agencies — had to be rebuilt from the ground up.

Macroeconomic Context

See also