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Buffett A-Z

They saw trouble as home prices soared, but …

Fri, Apr 20 2018 • 12:21 AM EDT
By Colleen McKown

The U.S. housing bubble in the mid-2000s was primarily fueled by subprime mortgage loans — loans given to people with low credit scores. After reaching their peak in 2006, home prices plummeted over the next few years as the bubble collapsed. The resulting foreclosures and declines in residential investments contributed significantly to the 2007-2009 recession. Warren Buffett and Charlie Munger warned against "easy lending" in 2005, but like many others, did not foresee the devastating impact the housing crisis would have on the economy as a whole.

2005: Early warning about easy lending

At the 2005 Berkshire shareholder meeting, Buffett and Munger say the growing trend of home loans without down payments is artificially inflating home prices.

2007: Subprime loans unlikely to be a "huge anchor to the economy"

Two years later, home prices start declining and some borrowers default on their loans. Looking ahead, Buffett predicts that while this will be a "big problem" for the institutions and individuals involved, he doesn't expect it to have a significant impact on the economy as a whole.

2008: Unprecedented "shock waves"

A year later, as the situation worsens, Buffett says fallout from the real estate bubble is hurting the economy in ways he's never seen before.

2009: Hopes for a turnaround

A few months after the credit crisis peaked in late 2008, Buffett is cautiously optimistic, telling shareholders "the situation is getting corrected." But, he warns, the problem won't be solved quickly.

2009: Defending Moody's

Amid heavy criticism of credit rating agencies for failing to warn investors about the potential dangers of mortgage-backed securities, Warren Buffett defends Moody's … and Berkshire Hathaway's big stake in the company.

2013: Don't blame the government

In looking back at the housing bubble, Buffett and Munger say it was fueled by a "bandwagon effect" as people wanted to get in on easy money. They argue it would have been difficult for the government to take the "punch bowl away from voters who wanted to get drunk."