The US Housing Market Bubble

The main cause of the mortgage crisis is the changes in policy for the mortgage industry. In the past, a fixed mortgage was the prime form of lending. All mortgages have the same payments for the mortgage duration and a large down payment was essential. The calculation of the mortgage was based on the initial amount borrowed, and house assessment rather than the rising value of the income and the house over the years.

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

As a member of the Millennial’s and as a student of economics, The Great Recession, the greatest economic downturn we’ve seen in 70 years is truly an intriguing topic. It is the first economic crisis that many of my generation can truly say we lived through. With the burst of the housing bubble and the failure of various financial institutions, the United States was dragged kicking and screaming from the prosperous age of nearly uninterrupted economic growth since the early eighties, into an unemployment rate of over 9% and a decline in Real GDP in the first time in decades. Years after the end of the recession we still reel from its effects. How did the fiscal crisis begin in the first place? What institutions helped exasperate the

To understand the causes of the housing prices peaking, it is necessary to understand the events beginning in 2001. Alan Greenspan, Federal Reserve

Numerous defaults, slump in the value of houses and mortgage finance securities, and shortage of liquidity in banks characterized the real estate and mortgage meltdown in the United States. The relative ease of credit, complexity of loans, and exuberance by people to procure loans fuelled the meltdown (Paul 2010). Sun, Stewart, and Pollard (2010) observe that policymakers, financial manipulators, and market speculators contributed to the meltdown. Competing needs among stakeholders also aggravated the meltdown. Mortgage finance firms, United States government, market investors, homebuyers, and shareholders also contributed towards the worsened meltdown (Sun, Stewart, & Pollard 2010.) The meltdown had disastrous economic and social consequences. Banking and non-banking financial institutions closed down while individual homeowners lost their houses via foreclosure. The fall in house prices resulted in investors incurring substantial losses. Banks closed due to liquidity challenges associated with default from loan borrowers. Closure of mortgage and financial institutions also led to massive unemployment. The meltdown had vital lessons, attributes, and roles to the real estate and mortgage participants.

The housing bubble was primarily caused by the low, short-term and variable interest rates, subprime loans given to less than qualified borrowers, and the collapse of big time lenders and investors due to failing collateralized debt obligations (CDO’s); all of these were made possible by a sense of “irrational exuberance”, a term coined by Alan Greenspan. There are two implications of the housing bubble burst that have not been touched upon yet. First, Construction is an important economic activity; the decline in the construction would greatly reduce GDP. Secondly, the decreasing home prices would reduce household consumption due to the wealth effect. The housing bubble collapse was the beginning of the 2008 recession, the worst recession since 1929. Not only did it effect the homeowners, but it transpired into the labor market and had a slight tug in the global recession that happened soon

The problem was everyone who qualified for a mortgage already had one. Lenders knew if they sold a mortgage to a person that defaults the lender gets the house, and houses were always increasing in value in that market, that would be a valuable asset to sell. To keep up with the demand from investors, lenders started selling mortgages to borrowers who wouldn’t have qualified before because of the risk for default. These mortgages are called sub-prime mortgages and lenders started creating tons of them. In the unregulated market, lenders employed predatory tactics to get more borrowers with attractive offers such as no money down, no credit history required, even no proof of income. People never would have qualified before were now buying large houses, and the lenders sold their mortgages to Investment bankers. The investors packed subprime mortgages in with prime mortgages so credit agencies would still give a AAA rating. The rating Agencies who had a conflict of interest by receiving payments from the investment banks, had no liability if their credit ratings were correct or not. They turned a blind eye to the risky CDOs and kept giving AAA ratings. This worked for a while and everyone was happy including the new homeowners. The housing market became hyper inflated with more homeowners than ever. Wall Street continued to sell their CDO’s which were ticking time bombs. The subprime mortgages began

The first perspective that we will look at is the timing of the housing boom. During this time residential investment moved above the average range and rose substantially towards the end of the year (Dokko, J., Boyle, B., Kiley, M. T., Kim, J., Sherlund, S., Sim, J., & Van den Heuvel, S, 2009). During

The mortgage meltdown is the period where the real estate market noticed a steep increase in home foreclosures that led to a period of insanity in 2007. This meltdown was the driving factor behind the economic recession that burdened the United States’ economy in 2008-2009. To begin, the housing bubble popped. The housing bubble was the highly overvalued real estate market. The burst of this bubble, which led to the financial crisis, was a correction to the overvalued real estate market. The real estate market, like any market, is subject to the basic law of Economics: supply and demand. It began with subprime lending all over the United States that showed a jump in demand or shift in the demand curve to the right. Subprime lending is where banks grant mortgages to individuals with poor credit history. In time, the individuals defaulted of their loans or failed to make payments.

They were taking on large payments without working towards the bill. This process left many people with large payments on their new homes after the economy collapse. After the meltdown, buyers began putting around five or ten percent down on their new home. This made it more likely for the new home owner to pay off their mortgage because they had more ownership in the property and more to lose. Money is much harder to get now because lenders look at a person’s debt. They also do not give one hundred percent of what the house costs. Buyers now have to double check the money aspect of purchasing a home. They cannot rely solely on a loan to pay for their home, they have to make sure they can afford the payments. This does not eliminate buyers from making poor decisions, but it does help some.

In the summer of 2007 the economy was overheating. This occurred because a large number of financial institutions had underwritten and invested in subprime mortgages. These are home loans that were marketed to buyers who cannot qualify for traditional mortgages. This is from some kind of issues they are having with their credit, income or the down payment. What made these assets so risky is the interest rate could be reset higher. This increased the chances that a wave of foreclosures could hit the markets at the same time (from owners who could not afford the payments). To make matter worse, a number of banks had invested a large percentage of depositor funds into these securities. (Addo, 2010) (Elul, 2008)

First in regards to mortgage meltdown it is essential to understand the causes of the issue in order to understand the repercussions of it. One of the key causes of the mortgage meltdown were the lenient loan practices by banks. Banks often gave loans that were not sustainable for the recipients to repay and they gave the loans easily to many who applied and lacked the proper qualifications. The consequences of this action resulted

With all of the incentives and mortgage products given so easily to people that couldn’t afford the high prices (including interest rates), many people defaulted on their first mortgages because they were no longer were able to receive the profit from the homes they first intended to flip. “During the first quarter of 2008, nearly 9% of all mortgage holders were delinquent or in foreclosure, the highest rate since recordkeeping began in 1979. Foreclosure filings more than

None of these explanations, however, is capable of fully explaining the housing bubble. From 1997 to 2006 nominal U.S. housing prices rose 188%. By mid-2009, however, housing prices had fallen by 33% from peak. As the United States attempts to rebuild its housing finance system, it is of paramount importance to understand what caused the housing bubble. Until we understand how and why the housing bubble occurred, we cannot be certain that a reconstructed housing finance system will not again produce such a devastating bubble. As you can see there are numerous theories and explanations for the bubble. Without getting too deep

Unfortunately, the real estate market collapsed, and then the financial system, due to a few underlying circumstances. Many people bought homes that were priced well beyond their means. They were able to do so because several mortgage lending companies enabled them with a wink and a nudge via various types of disreputable loans, such as “liar loans.” A liar