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We did, at least according to FTRANS Founder, John B. Hayes.

We killed the economy. You, me, the real estate agent next door, the home builder, the mortgage banker, and everyone else who bought, sold, built, appraised, financed, or refinanced a home between 2000 and 2006.  The fundamental problem is that the value of houses became highly inflated.  Who created this housing inflation?  We did. We wanted larger houses, which builders built, agents sold us, and lenders financed.  

The entire nation celebrated the increasing value in the price of housing as a good thing. Very few were asking the question “can we afford houses twice as expensive?”  We were making too much money to ask if it was sustainable. 

It did not take much of hiccup to kill the cow. Default rates started to climb and everyone started looking at what was the real value. Investors found themselves holding notes secured by mortgages on real estate that was nearly 50% overvalued – across the country. This is not just in low-income communities, as some have suggested. The data does not support the allegation that this collapse is entirely the fault in “sub-prime” mortgages. It certainly contributed, but the borrower in Alpharetta who was making $250,000 a year and bought a $1 million house is just as much to blame as the borrower who made $30,000 and bought a $120,000 house.

The problem of course is not just in housing. The artificial infusion of extra cash into the economy from the housing bubble has stopped. Real incomes are continuing to fall and everyone is spending less. As the economy moves at a slow rate, the value of commercial real estate will continue to drop, and there will be continuing business and bank failures.

So, what happens to get us out of this? First, the $5 trillion of phantom equity in residential real estate has to come out of the economy. Much already has, a significant percentage of which has been absorbed by all of us in some fashion, including the government’s rescue of the economy to cover the excessive build up of debt from 2000 to 2006. Real price of housing has to come into line with incomes – something close to the 2.3 ratio of the past 30 years, which is happening. However, since real incomes are continuing to fall, the price of housing has to continue to fall until this equilibrium is achieved. And, the fall in business revenues and profits has to bottom-out and the coming problems in commercial lending have to pass. I think it is going to be a long, slow process.  Read the whole article here.