The Economic Effects Of The Housing Bubble Collapse

The uncertainty of the financial industry and the nightmare of the housing bubble caused significant damage to the health of the economy. Businesses were unable to get loans, and employees were laid off. State governments suffered due to the high volume of debt and rising rates in unemployment forcing them to make major cuts to their budgets. All of this had a remarkable impact on the global economic climate as well that kept spreading, and many compared this recession to the Great

After the bursting of the United States housing bubble, many homeowners found themselves in a dire situation. Following the dot-com bubble burst, the Federal Reserve slashed interest rates, meaning credit was cheap. Lower lending standards also meant that consumers with not-so-great credit were suddenly able to attain adjustable rate mortgages with a minimum of money down and easy initial terms. In 2004, approaching the pinnacle of the housing market’s climb, former Federal Reserve Chairman, Alan Greenspan, actually encouraged Americans to take out adjustable rate mortgages. Then, as 2006 came, Americans saw the housing market reach its peak and subsequently plummet downward. As a result, it became difficult to impossible forthe borrowers

In 2001, the United States endured a short unexpected decline in the economy. With the terrorist attack at 9/11 and accounting scandals, a decline in the U.S economy was an obsession in the minds of the American people. However, in order to keep things at peace, the Federal Reserve determined that they will lower the Federal funds 11 times. The rate was then lowered from 6.5% to 1.75% in a matter of one year. This allowed bankers the power to award more borrowers with loans even if they had no job, income, or even assets. Even with no way of obtaining any income the dream of buying a home became a reality. It wasn’t long before everything became way cheaper.

The following essay will thoroughly examine the severe economic downturn of 2008, formerly known as the housing bubble collapse. We will mainly focus our discussion on the effects the financial crisis had on Canada and the U.S and examine why both countries were affected differently. Although the collapse of the housing bubble is the most identifiable cause, it is extremely difficult to pinpoint one specific defining moment or event triggering the global financial collapse. There are many factors involved, due to the complex nature of the financial systems across the world, and this paper will delve in the key contributing variables that led to this financial crises.

In 2008, the National Bureau of Economic Research publicized that the U.S. Economy had entered into a recession. The overall agreement of what was the primary cause of this recession was the credit crisis from the bursting of the housing bubble. This lead the U.S. into the worst recession in over sixty years (Holt).

The Housing Market of 2007 has been described as one of the worst financial crisis since the great depression. Not because the actual hit of the crisis, but because of the lingering effects that still plagues the United States and other countries today even in 2015. The United States economy was not economically prepared for the crisis that presented itself in 2007. This financial crisis hit a variety of areas such as the housing market which seemingly was one of the major causes of the financial.

Throughout the 90 's and the turn of the century, the housing market has stood as an economic pillar, supporting growth and prosperity and assisting generations in upward momentum from the lower to middle class. This is why the 2008 housing market crash had such a debilitating effect on the economy. The crash left millions facing foreclosure and millions more underwater. The burst of the housing bubble even effected international markets, causing havoc in other countries. These misguided policies were the main source of the financial turbulence that flattened the U.S. economy.

The real estate market in 2008 is notorious for sparking one of the largest housing bubbles in history. In order to understand the housing market during the bubble you need to recognize the events that caused it. This was simply an economical failure from the hands of some of the most well-known financial institutions and the Government. Going back to 1997 to 2006, if you take a look at the Case-Shiller Home Price Index (the leading indicator for the US housing market residential prices), you will discover a rise in nominal home prices of 188%. Although there is not a lot of consensus that uncovers what sparked the housing bubble, countless people have spoken their opinion in regards to this: misguided monetary policy; government policies pushing home ownership, consumer speculation of rising home prices, and lower housing supply. These examples can’t fully explain the crash, but they can provide insight as to what may have happened or at least contributed to it. This article goes into depth on some of the explanations to the housing bubble and how the burst of it eventually led to the credit crisis which sparked the entire recession in 2008.

The “American Dream” of owning an own house can be stated as one basic issue leading to the financial crisis. The issue is that banks borrowed money to individuals and families who had a relatively low income. This was possible because the interest rates were low and at the beginning, they did not even have to pay any interests. This fact allowed even poorer families to afford their own houses. This system worked well for a long time, because interest rates were low and house prices were growing steadily. This system of lending money from a bank and paying very low interest rates also worked in other areas despite the housing sector.

But what caused this Housing market threat? First, The Subprime mortgages, It starts off with greedy mortgage dealers who set the terms that are unfair to the people who desire to obtain the mortgage loan. These people were often families who were not even qualified for an ordinary home loan. Even though, these subprime mortgages offered low interest rate in the beginning, later on that would increase to double digit rates in later years. This was called teasers. The mortgage

The financial crisis of 2007-2009 can be attributed to many reasons: the Community Reinvestment Act, the creations and securitization of subprime mortgage loans, and the buying and selling of these securitized loans by banks. The Community Reinvestment Act was designed to “encourage” depository institutions of lending to all segments of individuals, predominantly those in low to moderate-income levels, preventing “redlining.” As a result of this act, subprime mortgages where created. The subprime mortgages were issued with variable interest rates, permitting borrowers to make payments only towards the interest and not their principal payment. As the rate of

When sky-high home prices in the United States turned downward, the entire United States financial sector and financial markets overseas faced its most dangerous crisis since the Great Depression. It all began when mortgage dealers loaned home loans to families that did not qualify for ordinary home loans. The terms of these loans were unfavorable the borrowers. These subprime mortgages may have started with low interest rates

The economy of the United States had been growing for 40 years. Also, the banks were regulated. [1] The congress had passed the Glass-Steagall Act in 1933, which had prohibited the investment banks from investing people's saving in the stock market [1]. In 1999, congress passed the Gramm–Leach–Bliley Act, overhauling the Glass-Steagall Act, letting banks to invest in people's savings [1]. Up to 2008, what banks did was they invested almost $5 Trillion in internet stocks. Furthermore, they lent people Adjusted Rate Mortgages with almost no money down(people loaned 99.3% of the money)to let them buy houses. What this means is they gave people a house for free with low-interest rates. Investment banks offered 150 different ARMs. Adjusted Rate Mortgages having low-interest rates logically leads to

“I think high housing prices is a new reality but I don’t think we just have to live with it. Steps can be taken by all levels of government and the private sector that this new reality is creating,” says James McKellar. Now that Canadians are speaking out about their concerns for the market and their stability, and professionals in the industry are beginning to become concerned, it is now the governments turn to speak and try to fix the problem or help ease the minds of canadians. According to the Aurora Banner, higher levels of governments are making moves to address the issue, including the federal government’s announcements to move and to tighten mortgage rules and closing a tax loophole for foreign investors. This means that essentially the government will be making it harder for people to qualify for a mortgage and for foreign investors when trying to purchase real estate. According to the Toronto Star, “As of Friday ,October 28, 2016, Minister Bill Morneau says that the government continues to be ‘vigilant in the monitoring the market’, so ‘we have no further actions under consideration in terms of housing’.” Their most recent change was to end tax breaks for non residents and make it harder to qualify for mortgages. This means, if you cannot qualify for a mortgage, you cannot purchase real estate in Canada.

Housing bubble in the years leading up to 2008 was a negative impact where real estate bubble where affecting the by more than half of United States economy and Americans. Houses prices where in the sky’s, there were few people who could afford hoses. The ones who were in the military and those who bought their house for the first time had been provided with especial benefits. In attention a collapse of housing bubble is capable of causing serous impacts of homes valuations, mortgage, markets and many other institutions that have larger investments. Furthermore, this bought the collapse of the housing that also came down with it was credit. Many homeowners didn’t have the money to pay their mortgage debts because the mortgage was increasing