As this investor money came pouring into the sector, banks needed more and more mortgages to back securities that would satisfy the rising demand. Banks pursued borrowers more and more aggressively. Credit standards began to decline as a result. Few people were denied mortgages. Not only did down payments become seen as unnecessary, but some mortgages effectively paid borrowers at first through negative amortization. Other lenders created new mortgage products that appeared affordable at first to borrowers, but reset to payments they could not afford in future years.

Due to all of these efforts to conjure up home buying, purchases ramped up to a rate never seen. They drove up home prices up by double-digit annual percentages in some regions. Starry-eyed market observers claimed that there had been a paradigm shift in residential real estate in the U.S. Even long-time homeowners got into the game by refinancing and cashing out some portion of their equity. Others took out home equity loans. Some people used this money for a noble purpose, like paying their the college tuition of their children, but others spent it frivolously on luxuries like vacations.

In this new market, just about anyone with a pulse could buy a home. Most people could even buy second homes. Home ownership rates rose to historic highs. Meanwhile, nobody much worried that the boom was out of control, because people believed home prices wouldn't decline.

The Bust

There's an adage that says, "Whenever something seems too good to be true, it probably is." The housing boom followed this rule. Most of those mortgages based on wacky new products or provided to borrowers with flawed credit backgrounds began going bad. Not only did this cause the housing market to collapse, but reverberations were felt across the financial industry and world. Credit virtually froze, and a deep recession began.

Over this period, home prices plummeted as foreclosures and distressed sales rose at unprecedented rates. Owning a home became a curse instead of a blessing to many. Even some homeowners who weren't involved in any of the boom-time antics saw the wealth that had accumulated through their home equity wiped away.

Today, in 2011, we remain in this phase of the narrative. Prices stabilized temporarily in 2009 and part of 2010, as the government's home buyer credit pulled forward some future demand, artificially raising home sales. But after it expired, prices began falling again, as the market resumed its search for an elusive bottom. Once most foreclosures and other distressed properties are purchased by borrowers who can afford them, the sector will stabilize.

The Good New Days?

Many analysts think that prices will stop declining sometime next year. Once foreclosure activity slows down to historical norms, the future will look a lot like the more distant past. Americans who had purchased homes with dollar-signs in their eyes will once again view buying a home like they did in the 20th century. The American home will no longer look like a rapidly growing pot of gold, a high-return investment that could never lose money, or an ATM. Instead, it will be once again seen as a place to live where a family can build equity over the years, and save some money by not paying rent.