Build-Up to The Crisis
In the years leading up to 2007, U.S. housing prices rose sharply. That expansion was accompanied by widespread risky mortgage lending, especially to subprime borrowers (Wolff, 2017). The first alarm bell rang when, in April of that year, New Century Financial, one of the largest subprime lenders, collapsed. Throughout 2007, major financial institutions began to announce large losses from mortgage-backed securities, resulting in a tightening of the interbank lending market —the cost of borrowing between banks spikes. The U.S. officially entered a recession in December 2007 (declared retroactively).
Then, suddenly, in March 2008, Bear Stearns collapsed. Investors refused to lend to it, forcing the Federal Reserve to broker its sale to JPMorgan Chase at a fire-sale price. September 2008 saw a system-wide meltdown. Fannie Mae and Freddie Mac were taken over by the U.S. government, Lehman Brothers filed for bankruptcy (the largest in U.S. history), and AIG was rescued by the Federal Reserve after massive losses on credit default swaps. Lending shut down almost overnight, stock markets worldwide plunged, and ordinary households saw immediate impacts: job losses, destroyed retirement accounts, and rapid home value declines (Wolff, 2017).
In October, Congress passed the Troubled Asset Relief Program (TARP), a $700 billion bailout for major financial institutions, while the Federal Reserve cut interest rates aggressively and launched emergency lending programs to stabilize the banking systems and prevent further collapse. However, normal people’s lives continued to collapse: home prices fell sharply nationwide, and millions of homeowners went underwater.
Real Estate Trends
Real estate ownership fell quarter-over-quarter for all age groups throughout 2008, but it is clear that young home-owners were affected the most. Throughout 2008, the value of the real estate owned by people under 40 dropped by 5% every quarter, while no other group saw quarter-over-quarter drops over 3%.
Net Worth Consequences
Having been forced to miss out on real estate ownership, the most meaningful vessel of wealth accumulation, people under 40 saw dramatic losses in net worth throughout 2008, peaking at losing 13% (!) of the 2008 Q3 net worth by 2008 Q4. While other groups also saw immense net worth drops through 2007 and 2008, by Q4 of 2009, both the 55-69 and 70+ age group saw increases in net worth held. The under 40 age group didn’t see any net worth growth until Q3 of 2011, and even that was minimal and the 40-54 age group even continued losing net worth into 2012. This crisis deepened the wealth gap between the younger groups and those older than them, another drastic step toward the rising economic inequalities we see today.