Housing Market and Credit Crisis Push U.S. to Collapse in 2007

Editor’s Note: This is one part of a series of stories looking at the top stock market stories since 2000.

If you were to graph the business news positives and negatives during 2007, it would look like a mountain scene with high peaks and low valleys.

The Bad News

On the negative side, gasoline prices continued surging past $3 per gallon and smaller cars became popular once again.

War in Iraq and uncertainty about the stability of Iran combined to push oil prices up, although there was growing concern that speculators were involved in the price rise.

The real estate market began to contract as lenders and investors grew nervous about subprime mortgages and declining housing prices.

Although few realized the extent of the credit crisis, it would very shortly plunge the U.S. into the worst financial disaster since the Great Depression.

Looking back, which is always easier, lenders and government regulators should have blown the whistle years earlier as home mortgages became the equivalent of a Ponzi scheme.

Homebuyers were encouraged to borrow more than they could reasonably afford with low or no down payment adjustable rate mortgages (ARMs)

The rationale was that home prices would continue to rise and the buyer would be able to refinance the loan into a fix rate.

This would be possible because the rising home values would give them equity where there was none.

As we all know, things didn’t work out like the people who originated the loans (many were on commission) promised.

Declining home values, which began to fall nationwide in 2007 would continue for the next several years.

Homeowners found they owed more money on the house than it was worth and some had to deal with the interest rate resetting on their ARMs, often doubling their mortgage payment.

Slicing and Dicing

Meanwhile, big Wall Street investment banks were taking pools of mortgages and other financial instruments and creating new investment products that made them billions in commissions and fees.

Some of the arrangements were so complicated few people on Wall Street actually understood what they were or how large of a risk they posed.

The slide down the slippery slope began for major banks, which proved fatal to some and forced the government to pour hundreds of billions of dollars into preventing the collapse of the financial markets.

The stock market began a downhill run, however the Dow also set a record high in 2007, making the market’s fall all the more dramatic.

The Positive Side

Technology news was one of the bright spots during 2007.

Apple introduced the iPhone and redefined the cell phone industry. The device included a cell phone, web browser and a dizzying array of special applications.

The introduction was followed close by with new models and software and tens of thousands of applications, which were developed by programmers outside of Apple.

Research in Motion, maker of the ubiquitous Blackberry, was caught flat-footed as were other “smart phone” makers.

I once said (many years ago) that Apple made the best computers and the best operating system, but couldn’t sell a cure for cancer.

Since those days, the Apple innovation and marketing juggernaut (Macbooks, iPods, and so on) has been unstoppable.

The smart phone field has become crowded since 2007, but they are all still playing catch up to the iPhone.

What Did We Learn?

It seems the markets and investors never learn that markets built on hype and the need for constant and significant growth are unsustainable.

After all, it hasn’t been that many years since the savings and loan collapse destroyed home values and the S&L industry.

Oddly enough, the major stock indexes closed the year higher than they started. However, the big three indexes also closed significantly lower than their yearly highs. That should have been a red flag of things to come.

Previous stories:

Stock Market Moves Higher and Housing Boom Nears Explosion in 2006

China's Influence in the Global Economy Grows in 2005

Stock Indexes Dull in 2004, But Gasoline Tops $2 per Gallon

Stock Market in 2003 Set Stage for Later Crisis

Deep Bear Market Begins to Turn in 2002

Attacks, Scandal Rock Stock Markets in 2001

Dot.com Collapse Heads Stories from 2000

Major Index Information for 2007