Housing Crash: Who's to Blame for the Rise in Foreclosed Homes?

Recently, PBS Frontline aired an eye-opening behind-the-scenes investigative report entitled, "Inside the Meltdown."

In the program, Frontline recounts the tense, down-to-the-wire decisions made by top finance executives, the Treasury Department, and the Federal Reserve to save the U.S. economy from an all-out crash that would have become the equivalent of a worldwide financial nuclear explosion had no action been taken.

So how did we get here? And who is to blame for our current economic woes?

From Technology to Real Estate

The popping of the tech bubble that began in March, 2000 caused many investors to flee technology stocks in favor of real estate investments. Go where the money is, right?

But it wasn't long before irrational exuberance took over and the real estate market began to heat up. I was working in the technology industry at the time, and I saw the devastation the popping of the tech bubble had on the industry first-hand.

Knowing this, I began to see signs of another impending bubble in real estate. But needless to say, any mention of a possible real estate bubble fell on deaf ears. People were making money, and the party was just getting started.

Early Signs of the Housing Bubble

During the spring and summer of 2001, my wife and I were searching for a home in the Northern Virginia suburbs of Washington, D.C. It was at this time when the real estate market was just starting to heat up.

Time after time, I was compelled to scrape my jaw up off the floor as my eye caught the sight of multiple competing buyers sitting at the kitchen table drawing up contracts for $10,000 dollars over the asking price of the home, on the very first open house day no less.

We kept asking ourselves, "Who has all the money to throw at these houses? Who has all these high-paying jobs where they can just plop money on the table like that? And to boot, the home is in need of serious repair!"

From that point onward, I was astounded as I saw speculative home prices skyrocket as ridiculously fast as the infamous dot.com stocks did in the mid-to-late 1990s. Even more confounding was the fact that home sales were increasing as home prices quickly outstripped even the higher echelon of salaries.

Soon, stories of bidding wars broke out as homebuyers worried about missing the boat merrily paid well over the asking price of the home. After all, why not? Rising home values meant more equity, which homeowners could cash out at any time, like an ATM machine.

It very much became an exercise in who had the most to spend, who was the most competitive, and who could outbid everyone else on the very first day the house went on the market. For homeowners, it was an exercise in whose house had made the most money in equity, and what to do with all those riches.

It was then that I saw the impending signs of an emerging second market bubble: euphoria, wild speculation, greed, and fear (of missing the boat) in the midst of a certain insanity that makes ordinary people do some really imprudent things.

In the Midst of the Great Housing Bubble

I knew what I was looking at was another market bubble, this time in real estate. But what I didn't know, and what even many financial experts never guessed, was the wide variety of "creative financing" financial instruments that would emerge along with subprime lending.

I never would have imagined people being able to buy a home without a credit check or producing proof of income. I never would of imagined interest-only loans, or toxic mortgages that would be packaged, repackaged, and resold to investors. I never would have imagined people buying $600,000 homes for only $1500 per month. Something just wasn't right.

And then came the infamous flippers, speculators, and scammers who quickly became the iconic symbols of greed and avarice in the midst of the greatest housing boom in American history.

Who's to Blame for the Housing Crash?

So who's to blame for the popping of the largest real estate bubble in American history? Lenders? Banks? Realtors? Brokers? Politicians? Investors? People who bought but couldn't afford a home?

The truth of the matter is, no one person is to blame because everybody was making money off of everyone else. It's just par for the course during the euphoria of a market bubble.