When the Twin Towers fell on Sept. 11, 2001, a glowing symbol of American capitalism was destroyed. Just a few months later, Americans were already talking about a new symbol of the nation's mighty wealth potential: the U.S. housing boom.
But could there have been a U.S. housing boom without the events of 9/11? It's a matter of much debate. What is clear is that certain factors that would lead to a real estate recovery were already in place before the attacks, most prominently the
plunge earlier that year.
Perhaps it's best, then, to say that without 9/11, there would have been a recovery in the housing market, which was in a funk in 2000 and the first half of 2001. But the terror attacks unleashed a series of policy actions that instead spurred a boom.
Most experts agree that the U.S. housing boom was caused by a confluence of factors set in motion in 2001 -- including very low mortgage rates and a newfound desire for tangible assets like real estate.
"In terms of the nationwide housing market boom, certainly the interest rate declines helped," says Lawrence Yun, an economist with the National Association of Realtors. "But there is also some element that is hard to quantify. In more uncertain times, people prefer having a tangible asset."
It's a mistake, though, to think that 9/11 alone created these factors. In fact, the Nasdaq's plunge in the spring of 2001 first put the ball in motion for the
rate cuts and the flight to hard assets after millions of Americans saw their paper wealth evaporate in the dot-com bust.
What 9/11 did was force the Fed to speed up its rate cuts, which translated into lower mortgage rates and home-equity extraction, which in turn helped fuel
strong consumer spending in the wake of 9/11. The terror attacks also added to the newfound American desire to be in safer assets, like real estate.
Prior to the attacks, the U.S. housing market was floundering with the rest of the economy. It's hard to imagine a time when housing wasn't a dominant topic on Americans' minds. But in 2000 and early 2001, housing sales were flat and residential spending was slow. People focused on high-flying stocks like
, not condos in Miami and bidding wars in San Francisco.
When the Nasdaq plunged in March 2001, there wasn't an immediate flight to residential real estate. In coming months, though, the gradual shift to houses and condos got under way, as evidenced by the strong performance of real estate investment trusts following the tech meltdown. Not too many people cared about REIT stocks when tech stocks were flying. That soon changed. The US MSCI REIT Index, then called the Morgan Stanley REIT Index, rose 9% from the spring crash up until the 9/11 terror attacks.
In summer 2001, the U.S. faced a weak economy, a weak stock market and a meandering real estate market. The Fed had already cut short-term rates from 6.5% at the beginning of the year to 3%. Then came the gruesome attacks.
"The Fed was cutting rates because the economy had slowed dramatically; 9/11 most likely worsened that recession," says Phillip Neuhart, an economic analyst with Wachovia
Interest rates and mortgage rates saw meaningful dips in the months right after 9/11. Sales did not immediately boom, though. Five weeks after the attacks, Jonathan Miller, head of New York City real estate appraisal firm Miller Samuel, thought about changing careers because the market was so slow.
But near the end of 2001, Miller began noticing some of the beginnings of the boom. Part of this was due to very low interest rates. In early November, the average rate of a 30-year mortgage hit 6.45%, the lowest level since the 1960s.
Around this time, Miller witnessed a five-way bidding war for a one-bedroom apartment in a nondoorman building in the East 50s -- an unusual phenomenon, since this was not a luxury property but a fairly generic one.
This trend began to repeat itself, and bidding wars became the norm in New York City and areas of California in late 2001.
By February 2002, the National Association of Realtors was reporting that January's existing home-sales data had hit a record monthly high. From December to January, sales set a record by increasing over 16%.
NAR said at the time that low interest rates were only part of the picture. Mild weather, an improving economy and better consumer confidence helped the numbers, the organization said.
By April 2002, Federal Reserve Chairman Alan Greenspan was already addressing the issue of a possible bubble forming in real estate prices. In the fall of that year, Greenspan said home-equity extraction had provided significant support to consumer spending.
At the end of 2001, Americans had $7.3 trillion worth of housing equity. By the end of the first quarter of 2006, that number had risen to $11.4 trillion
"What was unique about this cycle was the dramatic wealth accumulation of homeowners," Yun says.
Investors in homebuilder stocks like
also made a ton of money, although the past year has been unkind to homebuilders as the Fed's tightening campaign started to rein in the once rampaging housing market.
As the housing bubble deflates, no one knows for sure how dramatic the boom would have been if the terrible events of 9/11 had never happened. Still, it's hard to imagine any sort of housing boom happening without the dot-com bust first occurring.