1. Literature Review. (No project plan)
Over the past decade, the media and the number of well-known press constantly claim that the prices of house in US is realistically the best evidence of the existence of an asset price bubble in the housing market during the early 2000s. The first effort here we can look at is a survey by McCarthy and Peach (2004) which shows that the level of home prices relative to household income and the level of home prices relative to rent are commonly used to support claims of an asset price bubble. On the other hand, Holcombe and Powell (2009) listed 3 basic views as opposed to the existence of house price “bubbles”: the first one claimed that the existence of “bubbles” is expectedly the results of “real”
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As a result, this decision made homes more affordable which boosted the demand for houses and levelled up prices of housing. But could American household afford to pay for their own house all at once? Randall and Benjamin (2009) stated that approximately 70% of American homes are owned by their own households as for the majority of them this represents the most of their net worth income. In 1 order to take ownership of their homes, taking out a loan is the best option to pay for mortgage.
1.2 Subprime lending and Subprime mortgage.
During house price “bubbles”, subprime loans were introduced to people with low ability to pay off their mortgage, especially to households with low income. Unfortunately, these loans were distributed unevenly across the country (Silje Pileberg, 2014). His article pointed out that this loan was specifically for borrowers with low credit scores (FICO scores less than 640, for example). However, the system seemed not to work fairly just as Pileberg (2014) described. A recent research by Barth (2009) demonstrated that 31 out of 32 types of available mortgage products were chosen by prime borrowers from January 1999 through July 2007. This is because the difference between prime and subprime lending becomes artificial due to the fact that lender can define on its own which borrowers are subprime. The subprime lending eventually grew rapidly. Barth (2009) showed that subprime home mortgage originations went up
Since mid 1990s, the subprime mortgage market has grown rapidly experiencing a phenomenal 23% compound annual growth rate to 2006. The total subprime loan originations increased from $65 billion in 1995 to $613 billion in 2006. The subprime sector has become a significant sub-sector of the total residential market accounting for 21% of all residential mortgage originations in 2006. Similarly, by year-end 2006, total outstanding balance of subprime loans grew to $1.2 trillion, approximately 12.6% of all outstanding mortgage debt.
During 2007 through 2010 there existed what we commonly refer to as the subprime mortgage crisis. Through deduction of readings by those considered esteemed in the realm of finance - such as Ben Bernanke - the crisis arose out of an earlier expansion of mortgage credit. This included extending mortgages to borrowers who previously would have had difficulty getting mortgages; this both contributed to and was facilitated by rapidly rising home prices. Pre-subprime mortgages, those looking to buy homes found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans without the collateral, income, and/or credit history to match with their mortgage request. Indeed some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), otherwise, those facing limited credit options, rented. Because of these processes, home ownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.
With no other option, poor credit, no money for a down payment, these people were left to find rentals. This may have been a good temporary solution, but with rents increasing to levels higher than most mortgage payments, it is quickly becoming less and less attractive. Not to mention that this group of previous home owners has had a taste of what it feels like to own their own home, and they don’t want to give up the hope of having that again.
The most commonly known sub-prime finance crisis came into illumination when a sudden rise in home foreclosures in 2006 twirled seemingly out of control in 2007, triggering a nationwide economic crisis that went worldwide within the year. The greatest responsibility is pointed at the lenders who created such problems. It was the lenders who, at the end of the day, lend finances to citizens with poor credit and a high risk of failure to pay. When the Feds inundated the markets with growing capital
Is it really a “dream” to own a home, if doing so means being saddled with debt and undermining one’s financial security? Perhaps, in light of the risks of homeownership, one might consider renting, instead. This point of view is articulated by one columnist, who writes, “more Americans are consciously choosing to rent over buy” (Sullivan). Even among households making over $95,000 per year, the homeownership rate “declined from 87.3% in 2000 to 80.6% in 2012” (Sullivan). This downward trend in homeownership among those who would most easily able to afford a home indicates that Americans do not perceive homeownership the same way that they did before 2008. Now that the ugly underbelly of the mortgage lending system has been exposed, the prospect of homeownership is no longer as attractive as it once was. This does not mean that homeownership is suddenly undesirable. Rather, individuals are beginning to reconsider whether or not homeownership is a financially sound decision. Having equity in property can prove to be financially beneficial, but not everyone pays off their loan and takes true ownership of their home. During the Recession of 2008, nearly seven million Americans lost their homes to foreclosure (Wheelock). Therefore, the current shift towards renting is both economic and cultural. Americans are no longer buying homes for two main reasons. Either they simply cannot afford
House, a shelter for people which is one of a basic requirement for human survival in today’s world. According to Andriotis (2014) and Shlay (2006), homeownership is regarded as an aspect of the American dream for a long time (p.1). The American dream, a pursuit that a large number of US citizens seek, require individuals work hard to achieve it. In other words, there are a vast of people hard work in order to afford their property. People has possession of the house if they have enough money to afford the payment on a home and be willing to purchase it. Otherwise, people need to rent a house to guarantee that they have a relatively fixed shelter. However, there is the limited right for tenants, and they have to depend on the decision of owners whereas the landlord have the power to make a decision on the property since they have the housing ownership. Thus, whether buy or rent have become a fundamental problem that plagues the individuals. Elsinga and Hoekstra (2005) point that the homeownership not only in favor of personal, but also benefit the community (p.403). Therefore, buying a house is over than renting since it brings tremendous benefits to individuals. Specially, purchase a house is a desirable option that generates tax benefit, build self-confidence for owners, and profits the construction of community harmony rather than renting a house.
When researching past economic recoveries, the housing market is the one to drive the economy out of recession. That being said, this economic recession hasn’t had much of an impact until recently. America’s housing boom had a tremendous influence on the economy for its low prices and flow of new home construction.
According to Evidensgruppen (2013), what signifies a housing bubble is when housing prices increase considerably during a period of time until it collapses and the price falls. Throughout a housing bubble, we can see that house prices have no relationship with factors that usually matter such as income tax, interest rate and unemployment. The sudden price escalation creates expectations among consumers that prices will continue to rise. This creates an enthusiasm to invest in properties because people think that they can buy a house and then make a profit on it when they later sell it. But if the housing prices do not increase as expected, people have a huge loan that they cannot afford to pay back which leads to a financial crisis. When scientists
For decades, the idea of homeownership has become synonymous with that of the American Dream. In order to encourage Americans to pursue this dream, the United States federal government has created a bevy of programs that subsidize homeownership, including mortgage loan insurance provided through the Federal Housing Administration (FHA), government sponsored enterprises such as the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) that increase the money available for lending, and the home mortgage interest deduction.
Three out of four home owners say that their home is their biggest source of wealth. This statistic comes from the National Association of Realtors. When buying, you aren’t just buying a place to live, but also an investment in your future. It’s very easy for home owners to get in over their means. Suddenly the economy drops bringing the housing market down with it. Before you know it that long term investment has turned into a long term money black hole and you are headed towards foreclosure. Now that the economy is recovering, collective home prices are appearing and interest rates are low. Hopefully buyers can take what they have been through and make wise decisions when looking for a home. They will need to take a few actions, along with a few options they should be aware of before they even think about going all in on another mortgage. Create a savings, reestablish credit, rent-to-own or seller carry back, figure out their budget, and find a good interest rate.
As long as housing prices kept rising, it did not seem to matter”. Before the housing market collapsed there was a large increase in the “percentage of Americans owning their own homes”. There was also an increase in the size of the actual homes owned, as home sizes followed the mantra of “bigger is better” (R&G). The American Dream of owning your own home was no longer a goal to work towards for the future, but seen as a need of today. The problem with this mentality is that Americans
Maybe to them it will be simply easier than to pay off what might be required to pay for the house. Or maybe the dreaded mortgage of which we've all heard of will come to wreak havoc on our day. Maybe they do not want to deal with the little things that come with a house. Like a lawn or a yard that must be continuously maintained. Or the everyday simple problems that can arise in the household that otherwise the landlord would fix. But no matter the pros and cons of the ownership of a
Around 2006 the price of houses began to fall substantially fast. “The oversupply of houses and lack of buyers pushed the house prices down until they really plunged in the late 2006 and early 2007” (The Subprime Mortgage Crisis Explained). These actions threw investors into a big dilemma. In the beginning they believed buying the mortgages would bring them a profit, but quickly realized that the mortgages would cost them more financial damage than reselling the homes. “Nationwide, home vales have declined about 16% since the summer of 2006 and experts project that the drop will continue until homes have lost about 25% of their value” (Biroonak, 2008). In other words mortgage homes are “underwater”, that is, the mortgage owed equals or exceeds the value of the house (Biroonak, 2008). Investors and homeowners started to go more in debt trying to pay off their original debts.
Establish Credibility: According to US News, the great American dream of owning a home appears poised for a comeback. Real estate company Trulia reports that in many parts of the country, rents are rising while housing prices are falling, making buying a home more affordable. Trulia found that in 98 out of 100 major metropolitan areas, including Detroit, Atlanta, and Cleveland, buying has become more affordable than renting.” I think the mortgage catastrophe of 2001 left prospective home buyers afraid of buying a house without being extremely certain that is the right decision.
The model below shows the effect of trading costs in an asset bubble in four different scenarios. Looking at the first graph, a, the difference between these two quantities represents the “profits” that the asset owner thinks he is obtaining when he exercises the option to sell (Scheinkman and Xiong). So, when the trading cost is $0, the asset owner will sell his asset immediately when the trade becomes profitable, therefore these profits are extremely small. However, as the trading cost increase, the trading barrier increases along with it, as a result trading frequency is greatly reduced as increasing trading cost, as one would suspect. The interesting conclusion comes from figures 3c and 3d. They indicate not only do rising trading cost reduce the magnitude of the bubble, they also reduce the extra volatility component. But it is important to mention that the massive reduction in trading frequency may be offset by the increase in profits in each trade offsetting the reduction of the bubble. To summarize when trading cost are small, the value of the bubble and the extra volatility component is at its maximum potential. Whereas, increases in trading costs reduce the trading frequency, asset price volatility, and the option value (Scheinkman and Xiong). Despite this model being easier to interpret for the reader than an equation, this model emphasizes through various trading cost volatility can be controlled. Investors may be more reluctant to making an irrational decision