Things hadn’t been this bad for the American economy since the Great Depression: 2008 was a disastrous year.

Facing a hot housing market, lower-income would-be homeowners who hoped to get a piece of the action had taken out risky, deceptively marketed “subprime” mortgages that placed them in financial peril. When real estate boiled over and home values plummeted, these borrowers defaulted on their loans, dragging the entire economy down with them.

Or so the story goes.

MIT Sloan School of Management economist Antoinette Schoar studies the decisions people make about their money, from picking credit cards to investing for retirement. Housing is one of the biggest such decisions. It’s hard to pin down, Schoar says, but for many homeowners, their house represents more than half their wealth. Writing recently in the Annual Review of Financial Economics, she and coauthors Manuel Adelino and Felipe Severino take a deeper look at how consumer homebuying decisions contributed to the 2008 collapse.

Schoar and her colleagues reach a few surprising conclusions. First, shoddy lending practices, long blamed for sparking the ill-fated housing boom, were probably symptoms, rather than causes, of a larger problem of overoptimism. The team also say that the popular tendency to call the housing crash a “subprime crisis” — a problem that emerged primarily from the subprime mortgage loan market catering to less-wealthy consumers with relatively low credit scores — doesn’t make a whole lot of sense.

But the recession has definitely had an effect on homeownership. Census data show that 69 percent of Americans owned houses before the crisis, Schoar notes. After, that number fell to 55 percent. Knowable Magazine asked Schoar about her takeaways on 2008 a decade after the crisis, as well as her thoughts about the future. This interview has been edited for length and clarity.

Where were you in 2007, when the problem that became the financial crisis was beginning to emerge? Were you following what was happening in the housing market?

Yes. I was at MIT, studying the intersection of behavioral economics and consumer finance. I’m interested in the gamut of individual financial choices households make, and how they make them.

A year or two before the financial crisis, I had started becoming interested in the housing segment. It was clear that behavioral issues were playing a big role in what was going on.

What kinds of behavioral issues?

Specifically, the way people were thinking about house prices, which had been going up for a very long time — in the United States, for almost a decade, in certain areas at least.

House prices were very high relative to people’s incomes, and relative to historic levels. It was interesting to me to see consumers becoming actually more bullish in such an environment. The data should have made them more concerned. Historically, house prices always revert to the mean — once they go up a lot, they have always dropped back down.

I was getting so worried that in the late spring of 2008, I sold my house in Boston! That turned out to be a good decision [laughs]. But I was not expecting a Great Recession. I didn’t anticipate that bank failures would accompany the housing crash and that it would have such a dire impact on the economy. I just thought that house prices would go down somewhat.

You and your coauthors made two findings that contradict the usual narrative about the crash. The first was that exuberance about housing prices, rather than bad banking practices, got the ball rolling.

Yes. Consumers, homeowners and borrowers seem to have had very optimistic and overinflated views of how much house prices could still increase. They were willing to bet on the housing market, and to buy above and beyond what they might have normally, placing themselves at great financial risk. People often say that banks’ lax lending practices fueled this consumer optimism. But our research suggested that the housing market exuberance went hand in hand with it. Everyone, including the banks, got caught up in it.

A graph of US mortgage delinquency and default rates from 1970 to 2016, along with periods of recessions. While delinquencies of 30 to 59 days regularly have had ups and downs between 2.5 and more than 4 percent, longer delinquencies (60 to 89 days) stay fairly flat around 1 percent until 2007, when they nearly double. Defaults shoot from about 1 percent of loans in 2005 to nearly 5 percent in 2010.

The portion of US housing mortgages in default (loans with payments that are 90 days or more past due), began to climb soon before the start of the Great Recession in December 2007. By 2010, nearly one in 20 US mortgages had entered default. The dramatic rise in defaults triggered the 2008 financial crisis. Percentages show quarter-end totals of active first loans past due on properties with 1 to 4 units; data do not include mortgages already in foreclosure.

The problem with the banks was less a misalignment of incentives or deliberate mis-selling of loans to people who couldn’t afford it, and more, if you want, stupidity. It was this belief that house prices could only go up, and so it didn’t matter whether the person who was buying a particular house might lose his or her job and default on their payments. The bank would be holding valuable collateral and everything would be fine.

A lot of banking safeguards — like doing decent due diligence on the credit risk of homeowners or on the quality of the collateral — became really watered down during this time period because banks said, “Why? Prices are only going up!”

So banks who made bad loans are not to blame?

That’s absolutely not the idea to take away from our research! Buyers can get overoptimistic and can misunderstand housing dynamics, but it’s financial institutions’ job to know more than the consumer. The fact that banks were overoptimistic in making these mortgages doesn’t absolve them of anything.

Your second surprising insight was that the housing crash was mostly caused by middle-class homebuyers — not by less-wealthy buyers with subprime mortgages, who are often blamed.

Right. Many economists studying the crisis looked at it through the lens that had been touted in the press: this idea that the subprime segment caused everything. We thought that seemed too narrow an understanding of what had been going on. Maybe because we were living in Boston, a city where similar effects were going on in middle-class or upper-middle-class neighborhoods.

If you actually look at the size of the subprime market in the US, it is very small. These are mortgages of people who are poorer, have much lower income and can only take very small mortgages. The typical middle-class person in the US has a mortgage of around $230,000. The typical subprime loan is below $70,000.

Most mortgage dollars lent in the US economy go to the middle class and the upper middle class. When those segments have problems, that’s when the banking system and the rest of the financial system is impacted.

What could government do to prevent this from happening again in the housing market?

It’s very important for regulators, and in particular the Federal Reserve, to take into account that during times of exuberant expectations, a lot of individual banks may make bad decisions at the same time. If my competitor gives an ill-advised loan, if I don’t match it I’ll miss out on getting business. It’s a race to the bottom.

A sign placed by members of Occupy Cincinnati hangs on a locked front door of an unoccupied house in the East Price Hill neighborhood during a demonstration to protest home foreclosures in Cincinnati,

The consequences of overexuberance on US housing markets continued years after prices fell. Well after the recession officially ended, many homeowners were still underwater, owing more on their mortgages than their homes were worth. The spike in foreclosures, and the struggles of homeowners to fight eviction and loss of their properties, became one focus of the anti-Wall Street Occupy protests. During a 2012 demonstration, Occupy Cincinnati activists protested this home’s 2007 foreclosure.

CREDIT: REUTERS / JOHN SOMMERS II

Regulators need to put safeguards in place to prevent this from happening, perhaps by changing the provisioning of banks and forcing them to put in stricter requirements for loans when it looks like the housing market is overheating. Because of competitive pressure, you can’t expect the banks to hold the line on this one by one.

Did changes like the 2010 Dodd-Frank Act help accomplish that? Are regulators on top of the situation today?

Dodd-Frank and many of the regulations the Fed implemented post-2008 were very helpful and definitely move us in the right direction. But in my opinion, housing is the one market where regulation has failed, in many ways.

For instance, Fannie Mae and Freddie Mac, which buy and securitize pools of mortgages and sell them to investors, are still government-controlled and underwritten. Over the last 10 years, traditional banks have reduced their participation in mortgage origination and mortgage lending, because regulation has made it costlier for them. Half of mortgages are originated by nontraditional lenders like Quicken Loans and H&R Block, who make loans and then sell them to Fannie and Freddie.

These are new players in the mortgage market, and we don’t know how good they are at screening borrowers. If there’s a crash today, the banks will be less affected, because they’re not holding such a large chunk of mortgages, but Fannie and Freddie — which are public institutions — will suffer. And if they default, they default on the government, and that means all of us.

What are you studying now?

We just finished a project where we looked at how people assess risks in the housing market, using a housing survey Fannie Mae conducts.

We found that despite having just lived through this crisis, American homeowners see housing as a non-risky asset. Renters, on the other hand, think housing is very risky.

We think this explains why these boom-and-bust cycles are sometimes so prolonged. Part of the population — renters — only convinces itself that housing is safe after it has seen steep house price increases. Renters jump into the market at the very end of the housing cycle. That’s obviously the wrong time.

How are you feeling about the state of the housing market today?

I’m starting to get nervous, I have to say. I don’t think housing will cause a banking crisis again, because the big banks are much less exposed to housing.

But I worry that if we have another downturn in the housing market, which might not be so unrealistic, that now it potentially will have a drawn-out, almost hidden, but creeping effect. Because the government will be bailing out underwater mortgages, and it might divert a lot of resources from other things that are really important, like education.