A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

The Housing Bubble
The combination of government policies and changed
lending practices led to an enormous increase in the demand
for houses. Fueled by easy credit, house prices began to rise
rapidly. The initial rise in prices encouraged even more
buyers. Buying houses or apartments appeared to be risk free
as house prices appeared consistently to go up. And some
buyers made their purchases with the objective not of finding
a place to live but rather of quickly selling (flipping) the
house to some future buyer at a higher price. The pattern was
eerily similar to that of the bubbles described earlier.
The graph 
Inflation-Adjusted Home Prices
illustrates the
dimensions of the bubble. The data come from the Case-
Shiller inflation-adjusted home-price indexes. The adjustment
works by considering that if house prices increased by 5
percent when prices in general increased by 5 percent, no
inflation-adjusted housing price increase occurred. If house
prices went up by 10 percent, however, then the inflation-

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adjusted price would be recorded as a 5 percent increase.
The graph shows that for the hundred-year period from
the late 1800s to the late 1900s, inflation-adjusted house
prices were stable. House prices went up, but only as much
as the general price level. Prices did dip during the Great
Depression of the 1930s, but they ended the century at the
same level at which they started. In the early 2000s, the
house price index doubled. This index is a composite index of
prices in twenty cities. In some cities, prices increased far
more than the national average.
INFLATION-ADJUSTED HOME PRICES

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Source: Case-Shiller
What we know about all bubbles is that eventually they
pop. The next graph depicts the damage. The decline was
broad-based and devastating. Many home buyers found that
the amount of their mortgage far exceeded the value of their
home. Increasingly, they defaulted and returned the house
keys to the lender. In an instance of macabre financial humor,
bankers referred to this practice as “jingle mail.” On average,
home prices declined by two-thirds, not only wiping out the
real estate equity of millions of Americans but bankrupting
many of the largest financial institutions.