The Housing Bubble and the Massive Rewriting of History

I recently got into a discussion with my father about the housing bubble and its subsequent decline. During the discussion he said to me, "You know what the real cause of the problem was, don't you? It was those subprime mortgages." He went on to explain how those big, bad mortgage companies had taken advantage of ordinary home buyers. This analysis seems to echo the narrative told by the news media and America's politicians. While I don't want to let the mortgage lenders off the hook for fueling the housing bubble in its later years, they are by no means the primary culprits. The housing bubble had been well underway for several years before subprime mortgages became a significant part of the market.

The primary cause of the housing bubble is the same cause of all asset bubbles—the mass psychology that says the asset of the moment is the best way to get rich quick. Today that asset class seems to be commodities. A few years ago it was real estate. Before that it was stocks. At other times it has been everything from Beanie Babies to tulips. The problem with blaming "big corporations" for all the world's ills is that "the little guy" is never asked to accept responsibility for his own behavior.

Has everyone forgotten the tales of potential home buyers engaging in bidding wars and paying more than the asking price for homes? It wasn't the mortgage companies forcing people to bid above the asking price. That was the home buyer's own decision. Has everyone forgotten the real estate flipping TV shows like "Flip this House," "Flip that House," and "Property Ladder" that made home-flipping look like a quick way to get rich?

I remember numerous friends and family members during the upside of the bubble happily telling me how much their home had increased in value. I remember being told that real estate is the best investment you can make. I remember being told that by renting, I was throwing money out the window. I'm sure many other renters across the country heard the same advice from their family and friends. The message was clear: Jump on the bandwagon or you'll be left behind. It was the psychological bias known as "social proof" in full force.

You cannot buy an asset for more than its intrinsic value without losing money. As soon as people start to believe that the price they pay for an asset doesn't matter, financial disaster awaits. That is the real cause of the housing bubble—and its decline.