Back in 2000-2001, there were some of us long-time real estate people that thought we were due for a downturn. Historically the market ran its full cycle every ten years, and 1990 was the previous peak.
But thanks mostly to the 1997 rule that allowed homeowners to be exempt from capital gains’ tax on their first $500,000 of profit (if they had lived there two out of the last five years), the market kept rolling.
The mortgage industry, led by Countrywide, started pushing the more exotic loan programs, first the interest-only in the 2001-2003 era, then the option ARMs from 2003-2005. This extended the euphoria, beyond its normal life expectancy.
Yesterday’s graph by IHS Global Insight showed the ‘normalized value’ line continuing straight up, without any natural downturn/correction.
But the market was already getting overheated by 1999 or 2000 just due to the amateur speculators who were empowered by the 2-out-of-5 rule, and by year 2000 they were already onto their second flip.
A ‘normalized value’ estimation should include what should have been some sort of downturn early in the decade – this chart has an additional red line to approximate what might have been normal, if it weren’t for the wacky chain of events that artificially spurred the market.