Recent headlines have made it clear that the housing market has declined dramatically from a year ago, a reflection of how a free market system works. Ironically, that's both the bad news and the good news.

Since many of those who bought homes during the past decade or so (the under-45 age group) had never experienced a severe recession, they had unbridled enthusiasm about the benefits of home ownership. The older segment of that demographic would typically have rented for a decade or so before accumulating enough personal wealth to be able to qualify for a home mortgage. At that time, lending institutions were still very cautious about extending credit.

But times have changed. For starters, the universe of those offering loans expanded way beyond the typical retail bank to include auto manufacturers, offshore investment groups and domestic private capital firms, for example. The wider availability of capital and low rates at which it could be acquired by the largest capital sources gave birth to what we call “sub-prime” loans. In effect, we had funds looking for a home. Pun intended. Unfortunately, their name is only too accurate.

Second, when the competition among lenders heated up, payment schedules became much more appealing to borrowers. It suddenly became possible to “own” a home for about the same monthly payment as a rental. That monthly payment was deceptive, however, because it rarely included an escrow account for insurance and taxes. So what looked like a good monthly cash flow situation turned slightly ugly around year-end, when both property taxes and insurance premiums were due.

In many instances, these deals involved variable-rate loans, which were really a way to protect the lenders. Changes to the rates were timed to coincide with the lenders' best guess as to when the market rates would rise. They were also a way to get more money from a captive audience. Needless to say, these interest-only loans were not a good deal for qualified buyers, let alone unqualified ones.

In general, the people who were trying to become first-time homeowners were doing so in the context of a strong labor market and the expectation of significant increases in income. Two-income households had even more reason to be confident about their ability to manage cash flow. When the arrival of children turned some of these families into one-income households, however, they quickly found themselves in negative cash flow situations, particularly if they weren't ready to cut back on expenses.

Lenders seized the opportunity and began offering second mortgages and home equity loans to homeowners who had become strapped for cash. But with these loans came higher interest rates and harsh penalties for non-payment.

Finally, some of the blame also goes to the parents of this generation of homebuyers. A significant number provided down payments and supported the payment schedules for “adult” children who could not have gotten the loans based on their own income and assets. Although some consider this kind of help admirable, the consequences were not uniformly positive. As higher interest rates, insurance, and property taxes became the norm, in some cases both the parents and their offspring found themselves in trouble. In fact, the parents of some of the youngest buyers may be among those who had never experienced a sharp decline in fortune.

Unfinished homes are evidence enough of the impact on speculators. Clearly, we have to keep the memories of the bad times alive in order to assure the good times. Otherwise, we'll have another multi-billion loss on our hands.