Great credit-fueled bubble party, and then the bankers showed up with crack cocaine

Look, the bottom line is that houses flew up in value because a tremendous amount of new credit was looking for a place to go, and for the masses what asset is more expensive than a house? Answer - nothing.

So as incomes remained flat and manufacturing jobs went away, house prices exploded. Then we took the "equity" out of the homes and went out and spent it on stuff.

I love a good party, but this bubble fiesta got nasty in the end. We were all having a good time drinking the spiked punch, then the bankers showed up with crack cocaine (in the form of interest only and negative amortization loans). And damn, are we going to have a huge hangover in the morning.

What stands out in this housing boom is that average U.S. housing prices grew three times faster than disposable incomes.

How could that be? It became easier to tap into loans with adjustable rate mortgages or ARMS.
"Over 30 percent of all conventional mortgages closed in 2004 and 2005 were ARMs. The ARM share moderated to 25 percent by the second quarter of 2006," Brown said.

But among poorer-credit borrowing, or subprime loans, Brown said, "the share of ARMs was far higher, closer to 80 percent."

In other words: Eighty percent of the loans of the people who can least afford a house are facing enormous risk, escalating payments and possible defaults.

On top of that, a lot of loans were interest-only or worse, fixed payment plans that increased the principal owed on a house.

Brown said it's difficult to measure how many of these loans are out there -- but they "appear to have made as much as 40 to 50 percent of all loans securitized by private issuers of mortgage-backed securities during 2004 and 2005."

The FDIC economist says there are only two possible outcomes: A period of stagnation and weak housing prices or a sharp decline in housing prices "with severe adverse consequences for homeowners, lenders and the real estate sector as a whole."

Brown testified that the second alternative is "unlikely" for a variety of reasons. But before you celebrate, consider that a long period of price stagnation will be painful, too.

What stories do we tell about all this? For the past few years many people talked about how real estate investment was easy, profitable and certain. It was a sure bet, the promise of an early retirement. That's why this is not a housing bubble -- or a housing bust. We'll always need places to live. This is a credit bust. And, once again, this time the cycle matches our history.