Central Banking After The Crisis Final Paper : Study On The German Housing Market

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

The housing crisis of 2008 can trace its origins back to the stock market trends of the mid- to late 90 's. During a period of extended growth in the stock market, increased individual wealth among investors led to generalized increases in spending, including in the housing market. With more disposable income in the pockets of consumers, the demand for housing increased in the late 90 's. Due to the fact that homes are large projects and their construction takes a large amount of time, the supply of homes in the market is inelastic on the short term. Because of the fixed supply of homes, as per the law of supply, which

With the consistent increase of property prices and more personal debt than ever before, we assume that there’s a housing bubble in Australia. The statistics show that from 2008 till now, property prices have been going up as a result of increased mortgage debt. When it slows down, that could cause a property crash. We are sure that there’s a housing bubble, but we cannot confirm when it will finally burst although a few area in Australia has already met a decrease of house prices. There are 3 indicators of the housing bubble in Australia.

During this time period, homeownership typically required a 20 percent down payment (Melicher & Norton, 2014, 168). Lending institutions were very careful about whom they lent money to, and credit standards were high (Melicher & Norton, 2014, 168). Melicher & Norton (2014) called this the “save now, spend later” philosophy, and it would change in the coming years (p. 168).

The US housing bubble and crash of the early 21st Century was unusual in that it was a truly national phenomenon. Historically, the bulk of residential real estate boom-bust episodes were usually regional. The consolidation of the US banking system, whereby banks merged across state borders, helped to sow the conditions where housing cycles became less provincial. Additionally, the growth of the Government Sponsored Enterprises (GSEs) facilitated the expansion of a national mortgage market. Recently, some commentators have been noting that the post-Great Recession recovery in US housing has reached dangerous levels, thereby implying that the sector could be experiencing another bubble. Consequently,

Macroeconomics is an excellent tool for the analysis of the housing industry as something like a capital good, as a home is considered to be, cannot easily be studied in a short-term platform. Real estate is a good that costs several times more than an average persons annual income, in the United States that number is typically 7 times as much, and in the United Kingdom that number is 14 times as much. Several factors of both supply and demand directly impact the housing market on a macroeconomic scale. (Business Economics, 1)

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.

Big banks in the middle 2000s were flourishing of the money made from selling the mortgages to big investors. While this was great when the banks were giving money to people who were reliable and were going to pay their mortgages every month. And when the investors were making such a hefty profit they wanted more. This is when Subprime mortgages were widely used, giving less reliable lower credit scores the opportunity to get homes. The banks knew that these people would not necessarily always be able to pay, which was the one of many mistakes (Crash Course.) The banks learned that while it did sometimes work out, the consequences of giving out too many unreliable mortgages can bring the whole nations economy down for the housing market has always been the pillar of the economy. The greed of the extremely wealthy continued to overpower the common sense of the

The housing crisis in the late 2000’s was created in part from subprime loans that lenders gave to individuals that did not have to provide proof of income that they could afford the house. This was a disaster likely to repeat itself. If a person is hoping to buy a home, they will buy whatever the lender allows them to purchase even though it could be a financial stretch. Lenders, builders, sellers, appraisers, buyers, owners, and governmental policy makers are all still gambling with the economic future of both their buyers and the American economy as a whole.

It seems hard to believe that over ten years have elapsed since the peak of the US housing market in the previous economic expansion. Residential construction as a percentage of real GDP reached a zenith of 6.2% in 2005 Q3. The ensuing contraction saw this share decline -60% to trough at 2.5% of GDP in 2010 Q3. The current economic expansion began in 2009 Q3, but the sheer magnitude of the collapse made it virtually impossible for any subsequent housing recovery to impart the same outsized contributions to headline GDP growth compared to the previous cycle. This has consequently played a significant role in restricting the ability of the economy to shift into a higher gear of growth during the current

Though in most areas of the country the housing market has rebounded even creating another balloon in the real estate market. Many lessons were taught with the collapse of the housing market. Having purchased my first home in 2015, I found out how selective mortgage lenders are now with providing mortgage loans. The lowering of the interest rate and the increase in employment has help stabilize the economy and revived the housing market. Dokko, Doyle, Kiley et all validated that America strayed too far away from the Thomas Rule when issuing interest rates and when valuing properties.

During this financial crisis various economic models on interest and inflation rates would be see buy a home as highly irrational, even for consumers who are wealthy. Despite its irrationality many people are still in purchasing or thinking of purchasing a home, and in order for economist to understand this economic action they must take into account the sociological aspects behind it as well. This is due to the idea of purchasing a house being more complex than the economic surface that is seen. There are many other more deeply embedded (and reliable) explanations as to why, especially in a time of total financial crisis, would anyone even explore the thought of purchasing a home.

This research topic is significant to the current property market in Singapore and its sudden increased demand for houses despite the economic downturn, exploring deeper as to whether the government policies were the real influential causes to this boom in property demand. It has relevance to the economic concepts of demand and supply, elasticity, inflation and monopolistic competition. This topic is worthy of investigation because it is a hot media topic in Singapore, and is widely debated in the country because it’s the most expensive household asset.[2]

According to Wikipedia a housing bubble is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline. Four years into the housing bubble downturn, much of the country remains hopelessly confused about what happened, why it happened and who is to blame. In my research paper I will try and demonstrate what a housing bubble is, some of the reasons for the bubble, was it preventable, how it kept growing, how it burst and how it has affected our economy.

Besides, low interest rates and large inflows of foreign funds created easy credit conditions for years before the crisis and that simulated the boom in housing construction (Steverman and Bogoslaw, 2008). Moreover, easy credit and money inflow greatly contributed to U.S housing bubble and the rise of house’s price.