Jean-Francois Martin

From the 1940s until very recently, U.S. housing policy consisted of two words: more homeowners. Everything from highway construction to taxation revolved around that goal. And the results were spectacular, as ownership rates went from 62.1 percent in 1960 to a peak of 69 percent in 2004. Equally spectacular—but with dire consequences—was how the “American Dream” mutated into “America’s Piggybank” and then “America’s Nightmare” within the last decade. During this period of excess, buyers agreed to—or were duped into—home purchases their incomes couldn’t afford, and owners used those homes like ATMs to perpetuate more lavish lifestyles. Builders and developers interpreted demographic data—particularly about Hispanic buyers—in ludicrously optimistic ways to justify their expansion ambitions. Mortgage companies sank their underwriting standards to new depths. And, inevitably, investors pounced on opportunities to exploit a thriving market, even as they ignored the quicksand upon which that market had been constructed.

That few people expected home prices to ever come down, or gave much thought to what that descent could mean for the debt-inundated economy, speaks to how lawmakers, analysts, and the general public simply took housing and mortgage lending for granted. This “failure of imagination,” as Dean Johnson, chief economist of Comerica Bank in Dallas, calls the current housing and credit crises, led to a financial meltdown of global proportions. And America’s now-struggling housing industry—which one economist calls a “hapless participant” in the economy’s spiral—finds its pleas for help mostly falling on deaf ears of government officials, lenders, and investors who have convinced themselves that other sectors of the economy—financial institutions, auto makers, credit-card providers—are more worthy of rescuing.

That meltdown laid bare an economy that’s been manipulated by financial instruments whose complexities outran regulatory restraints. It also undermined confidence in free-market capitalism and the expertise of lenders, brokers, economists, the media, elected officials, and appointed regulators, who seemed clueless as they lurched from “solution” to “solution.” Restoring that confidence is critical to the economy’s recovery, but it won’t be easy in an environment of rising unemployment and tighter credit.

The following special report examines the root causes of the country’s malaise and offers suggestions about how it might play out. One scenario foresees a more cautious housing industry with as few as half the builders it has now (which to some observers is precisely what big builders want to happen). But what lessons will be learned from all this turmoil? That dramatic and potentially disastrous financial cycles are simply inevitable? Or that a better way might be conceivable through a responsible and coordinated application of planning, rules, and guidelines that isn’t motivated solely by self-interest.