Rise and Fall Housing Market

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The Rise and Fall of the Housing Market Edward Maher University of Maryland University College ECON201 August 18, 2011 Introduction The collapse of the housing market had far and wide ranging effects in the economy of the United States. While the effects were felt throughout the country, California, Florida, New York, Michigan, Illinois were dealt devastating blows to their respective economy. Throughout the country, foreclosures rose to staggering numbers and jobs lost were in the millions. This research paper will concentrate on the causes and consequences of the housing crisis and will attempt to determine if there is any fault for not controlling the crisis. Causes of the Housing Crisis The term bubble has been used…show more content…
Between 2004 and 2006, the Federal Reserve Board raised interest rates from 1% and capping out at to 5.25%. Even with interest rates on the rise, the housing bubble continued to grow. Why did the bubble continue to grow when typically interest rates increase homeownerships typically declines as well? Economists look at the lending practices before and after the bubble. Prior to the bubble standard typically included, “documentation of credit histories of prospective borrowers, their current income and assets, evidence of job stability and pay, and related factors that in theory help a lender assess a potential borrower’s ability to pay for a mortgage.” During the 2000’s lending practices eased with the government continuing to push their policy on continuing to grow homeownership numbers. To continue homeownership lenders developed new innovative loans such as, “piggy back loans (80/20), adjustable rate mortgages, stated income loans, negative amortization mortgages, and multi-layered risked.” These loans gave homeowners many options as with piggy back loans, allowed consumers to purchase a home without having to put down a down payment, however they would have a first and second mortgage. Many consumers also opted for adjustable rate mortgages such as interest only loans. These loans allowed the consumer to purchase a home that would most likely be out of their monetary range, with
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