2006 US Housing Market Peak

The 2006 US housing market peak sits awkwardly in the crisis timeline. By summer 2006, the Case-Shiller National Index had risen 106% from January 2000, compared to 16% cumulative CPI inflation and 30% cumulative wage growth. Affordability was at historic lows. Stated-income, zero-down, teaser-rate mortgages had become ubiquitous. Subprime mortgage origination had grown from $160 billion in 2001 to $600 billion in 2006. Securitization chains rated toxic loans AAA. The turn was gradual, then sudden. Home prices peaked regionally in different months, some markets peaked in late 2005, others in 2006, the national index topped in July 2006. New home sales peaked in July 2005. Existing home sales peaked in September 2005. But the peak in prices lagged because sellers held firm on asking prices while transaction volume dried up, creating a roughly 12-month gap between volume peaks and price peaks. The mortgage credit channel cracked in late 2006. HSBC warned on subprime losses in December 2006. New Century Financial, a top-5 subprime lender, collapsed February 2007. By March 2007, subprime ABX indices were pricing 30-50% losses. The August 2007 BNP Paribas money market fund suspension is commonly cited as the start of the crisis, but the underlying deterioration had begun nine months earlier. By the time Bear Stearns hedge funds collapsed in July 2007, an entire generation of securitized subprime had already gone bad. The structural causes were multiple and interlocking. Community Reinvestment Act pressure for more mortgage lending, Alan Greenspan's 2003-2004 low rates creating a reach for yield, private-label securitization competing with Fannie and Freddie on underwriting standards, rating agency conflicts of interest, and ABS CDO structures that laundered BBB-rated subprime into AAA tranches. The 2008 crisis was not caused by subprime alone, it was caused by $10 trillion of leveraged financial products built on the assumption that US national home prices could not fall. The peak in June 2006 was the moment that assumption quietly broke.