BEFORE THE CRASH
If the '90s Housing Market Taught Us Anything, It's That Bigger Isn't Always Better
The dawn of the Internet era changed how people buy homes forever, and government policy attempted to change who bought them, too.
The 1990s started off as a hangover from the rager that was the ’80s in more ways than one, and it was a headache felt particularly by the housing sector. The real-estate boom of the ’80s culminated in a rocky start to the subsequent decade, kicking off with a recession that hit the home-buying market right where it hurt. And in retrospect, the last decade of the 20th century served as a kind of bellwether of the market turbulence to follow in 2000 and beyond.
Deflating and Inflating the Bubble
Home prices rose steadily through the ’80s, peaking in 1989 with an average price of $151,200 before sliding to $141,700 in 1992. While the downturn wasn’t necessarily a national event—and was nothing compared to what lay ahead in 2008—it did cause some troubling declines in key markets around the country. In New England, housing prices topped out in 1988 before losing more than 32 percent of their value by 1997, according to a 2009 report by the Federal Housing Finance Agency. Prices in the region didn’t start bouncing back until early 1998. Home prices in California saw a similar drop-off, though they didn’t climb nearly as high pre-crash as their New England counterparts, according to the same report. But as the economy recovered from the early decade recession and interest rates stayed low, the national housing market was quick to rebound. Just before the turn of the century, the average home sale price was $204,800, according to the U.S. Bureau of the Census.
Amidst this, the seeds of a massive lifestyle shift were underway, with consumers turning to the emerging internet to address their needs. As modem speeds increased and owning a personal computer became more common, the ways in which buyers researched all sorts of purchases—including homes—began to change. The launch of the National Association of Realtors®’ (NAR) consumer website, realtor.com®, the first public, digital real estate portal, came in 1996, allowing prospective homebuyers to browse property listings online and, by the end of the decade, the website boasted listings for 1.3 million homes, increasing the transparency of the home-buying process.
This new connectivity coincided with a sharp, steady uptick in U.S. homeownership rates, which climbed from 63.9 percent in 1990 to 67.4 percent in 2000, according to the U.S. Bureau of the Census. The factors behind this increase included “the improved economic and financial status of households associated with higher incomes, better employment opportunities and demographic changes such as the aging of baby boomers into prime homeownership years,” James L. Freund wrote in “The Causes of Increase in Homeownership in the 1990s,” a report published by the Research Institute for Housing America.
Is Bigger Better?
It wasn’t just that more people were buying homes, either—they were also buying bigger homes. The average single-family home broke the 2,000-square-foot mark just before the start of the ‘90s. The upward trend continued, hitting an average of 2,266 square feet in 2000, at which point about one quarter of homes built in the past decade had four or more bedrooms. That figure jumped to 31.2 percent between 2000 and 2004, according to the U.S. Census Bureau.
A major demographic shift was underway in the mid-90s as well, with minority homeownership increasing dramatically, thanks in large part to changes at the policymaking level. In 1994, the homeownership rate for African Americans was 41.2 percent. It climbed to 47.2 percent by 2000 and peaked at 49.1 percent in 2004, according to the U.S. Census Bureau. From 1993 to 2006, these numbers increased 25.6 percent, jumping from 47.7 percent to 59.9 percent.
Giving Credit Where Credit Is Due
Much of this can be attributed to changes to credit and mortgage practices over the course of the ’90s. While the Fair Housing Act of 1968 had prohibited housing discrimination based on race, color, national origin, religion, sex, and familial status, credit-worthiness still stood as a barrier to homeownership that disproportionately affected minority buyers.
In 1992, the Federal Housing Enterprises Financial Safety and Soundness Act required mortgage-purchasing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to increase their lending support for affordable housing by buying mortgages made to underserved borrowers. By 1995, Fannie Mae was receiving affordable housing credits for purchasing subprime securities—commodities backed by mortgages made to higher-risk borrowers with lower credit scores. In 1999, Fannie Mae further eased credit requirements for mortgages.
As a result, the disproportionate influence of credit as a barrier to homeownership for African Americans as compared to whites greatly diminished, though actual disparity in homeownership rates persisted. Another problem, however, emerged: the introduction of subprime mortgages onto the balance sheets of Fannie Mae and Freddie Mac set the stage for the financial meltdown of 2008.
As the century came to a close, fears mounted that the rebounding market had peaked, especially after the dot-com bust in 2000. The recession that kicked off the aughts understandably made experts wary. “Ultimately, the weaknesses that infect the stock market almost always catch up with the property market,” HSBC’s Ian Morris told the New Yorker in 2002. But given what happened in the first decade of the new millenium, those fears seem quaint. The 41.9 percent increase in average home sale price over the course of the ’90s paled in comparison to how high they’d climb in the decade to follow. As the world would soon find out, that accelerated growth came with consequences.