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K. Bardos1, N. Zaiats2

1Fairfield University (UNITED STATES)
2Simmons College (UNITED STATES)
The financial crisis of 2008 has drawn an unprecedented attention towards real estate as one of the largest asset classes that constitutes a significant portion of a household’s net worth, and plays a considerable role in the overall economy. A major cause of the real estate bubble, and subsequently, the financial crisis, was that millions of individuals bought more houses than they could afford, assuming that real estate is a “good investment.” This was possible to a large degree because all involved parties – homeowners, mortgage originators, investment banks that securitized mortgages, rating agencies, and investors in mortgage-backed securities - appeared to expect only appreciation in real estate prices. Many market participants had an incorrect perception regarding real estate returns and did not understand the many complexities of mortgage financing. Gerardi, Goette, and Meier (2010) show that financial literacy played an essential role in the subprime mortgage crisis. Similarly, Robert Shiller, in a 2009 New York Times article, argues that lack of knowledge about real estate and its financing contributed to the crisis because many individuals made incorrect personal finance choices.
Why did so many market participants hope for continuous price appreciation? Did the house prices always go up prior to sharp declines in 2008? Has real estate been a good investment? The answers to these questions are important in understanding how real estate market became the cornerstone of the worst coordinated recession since the Great Depression.
This paper provides background on the real estate market, the role of real estate in a household’s portfolio and the overall economy, as well as an overview of various developments preceding and contributing to the financial crisis of 2008 (Section I). It discusses some common misconceptions about real state returns (Section II). It then discusses the limitation of real estate training in business schools and offers simple ways of incorporating basic real estate education within the current business school curriculum (Section III). The final section concludes.