Reasons For The Housing Bubble

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

The bursting of the housing bubble, known more colloquially as the 2008 mortgage crisis, was preceded by a series of ill-fated circumstances that culminated in what has been considered to be the worst financial downfall since the Great Depression. After experiencing a near-unprecedented increase in housing prices from January 2002 until mid-2006, a phenomenon that was steadily fed by unregulated mortgage practices, the market steadily declined and the prior housing boom subsided as well. When housing prices dropped to about 25 percent below the peak level achieved in 2006 toward the close of 2008, liquidity and capital disappeared from the market.

In 2007, the U.S. fell into a deep financial recession. One of the main causes of this was the bursting of the housing bubble, which lead to a housing crisis. What is a housing bubble? A housing bubble is defined as “a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices” (businessdictionary.com 2014). When the bubble bursts, the result is a quick decline in home prices (businessdictionary.com 2014).

There are a numerical amount of variables that happened that caused the housing market to collapse. But if you were to ask any “average Joe” that lived through the market collapse, he would most likely point out that subprime loans and changing interests rates caused the failure. Even though this answer is common, it’s not completely accurate. Subprime loans and changing interests rates was not the sole driver of the market failure because the market is not driven by itself, people work in the market that have there own set of agenda that were driven by greed. This comes to my first causes of the housing bubble, Bad people and bad policies.

According to Loungani, (2010) “Robert Shiller is well known for predicting the U.S. stock market crash of 2000–01. In 2003, he warned that U.S. house prices too contained a “bubble”; that is, they had risen far beyond what was warranted by fundamental driving forces such as income growth, interest rates, demographic change, and building costs.” (pg. 16) This is a clear example of how macroeconomic volatility affects the housing industry as well as other industries that feed off of the housing industry such as construction.

The houses price rose 130 percent between late 1990’s and early 2006. The lending of new mortgages became very low, during this period. Because of the decreasing of credit, more people invested in house market. Then, the prices of houses kept the rapid growth. Accordingly, the mental factor was an important factor leading the housing boom and bust.

In 2007 the worst housing market crash in U.S. history took place. Foreclosures and housing-related bankruptcies surged significantly. This ultimately caused the financial crisis the next year which nearly caused the United Sates to go into another great depression. So how did this housing bubble occur and what happened that caused the bubble to collapse?

It has been 7 years since the housing bubble burst and the financial systems collapsed back in 2008. Since then, some will say that the housing market, as a majority, has healed and regained footing but is that entirely accurate? It has been an up and down rollercoaster since the collapse of 2008, however the housing market has only started to recover within the past 2 years. “Right now, I would say we are 64% back to normal and a lot of what is driving the housing market’s strength is existing home sales, but prices have also helped push the recovery” (Jed Kolko, Trulia). As stated in the first paper, the housing bubble burst because of the increase in interest rates that put homeownership out of reach for some buyers. This ultimately caused homes to become unaffordable, leading to defaults, foreclosures, and short sales. More so, on December 30, 2008, the home price index reported the largest dip in home prices ever recorded, losing 33% from its 2006 peak to 2012. This financial crisis, unanticipated by most, caused the United States to go into a recession and has been known to be most significant risk to our economy. It was the beginning of last decade, 2000, when real estate prices rose at an unprecedented rate, subsequently leading to the bursting of the housing bubble starting in 2006.

The housing market had raising prices that economists thought was just steady growth. However, once the prices began to drop people grew fearful and stopped buying. This totally through the market off and it crashed. The country from there financially spiraled out of control.The cause for this bubble and the bursting of it can be attributed to banking that was irresponsible to say the least. Bankers were handing out to mortgage loans to people with low income jobs and poor credit

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

Housing prices have been rising steadily, but rumors of a new housing bubble are tempering optimism. Many reports are suggesting that the current housing bubble is greater than the one that formed in 2006 and burst in 2008. But is there any truth to these dire predictions, or is it just media hype and speculation?

After housing prices in the United States skyrocketed, Americans and foreign investors alike rode the benefits. However, most parties involved did not anticipate the impending bubble and could not have foreseen the outcomes of its sudden burst. The burst of the housing bubble contributed to a financial crisis and recession. It was one of the worst economic downturns since the Great Depression and affected many sectors of the economy. Several factors such as government policy, brokerage incentives, and securitization all played key roles in the bubble’s burst. A better understanding of the housing bubble is achieved through analyzing it, a comparison with that of Canada, and the effects of the financial crisis throughout the world.

The notion of a bubble is really defined in terms of people’s thinking, expectations about future price increases, theories about the risk of falling prices, and worries about being priced out of the housing market in the future if not sold. This literature review presents different views of people and economists which are published. The whole section is divided into segments, the former talking about the recession of 2007 -2008 and the Housing bubble and the latter talks about the newspapers articles and other opinions of economists which support the idea of approaching bubble. These reflect the conditions in those specific areas related to them or demonstrate the housing behavior in overall United States.

The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.

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.