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 by Businessdictionary.com (n.d.) as a “temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices. As with most economic bubbles, it eventually bursts, resulting in a quick decline in prices...if a housing bubble swells to an extremely high level, the aftermath of the burst may set the housing market back years” (businessdictionary.com). What this means is that people believed home prices would continue to rise, so home buyers sought to buy, while lenders sought to lend, because of a misguided belief that home prices would not drop. Falling home prices caused the housing bubble to burst, which contributed to a housing crisis.
Leading to the bursting of the housing bubble were three major contributors: a cultural change in American society, a push by the federal government to get people to home ownership, and subprime lending by financial institutions. These events coincided to create the 2008 housing crisis. Many people ended up with homes they could not afford, and lending institutions ended up with homes that were underwater.
Cultural Change
At one time, Americans were known as people who saved money. This was true during and after WWII, when people began purchasing government savings bonds at rates between seven and eleven percent (Garon 2012). The savings rate by the 1960s was seven to eight percent (Melicher & Norton, 2014, 168). This was a period when people would save to purchase wanted items, like cars and household goods. If you didn’t have the...
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...trieved from http://www.federalreserve.gov/pubs/bulletin/2000/0900lead.pdf
Garon, Sheldon. (2012, Feb 16). Why America Spends While the World Saves. Interview with Fareed Zakaria [Web log article]. CNN World, 2012. World Press.com. Retrieved from http://globalpublicsquare.blogs.cnn.com/2012/02/16/why-america-spends-while-the-world-saves/
Holt, Jeff (2009). A summary of the Primary Causes of the Housing Bubble and the Resulting Credit Crisis: A Non-Technical Paper. The Journal of Business Inquiry, 8, 1, 120-129. Retrieved from http://www.uvu.edu/woodbury/jbi/volume8/journals/SummaryofthePrimaryCauseoftheHousingBubble.pdf
Housing Bubble (n.d.). Business Dictionary.com. Retrieved from http://www.businessdictionary.com/definition/housing-bubble.html
Melicher, Ronald W. and Edgar A. Norton (2014). Introduction to Finance (15th ed.). Hoboken, N.J.: John Wiley & Sons, Inc.
Just as the great depression, a booming economy had been experienced before the global financial crisis. The economy was growing at a faster rtae bwteen 2001 and 2007 than in any other period in the last 30 years (wade 2008 p23). An vast amount of subprime mortgages were the backbone to the financial collapse, among several other underlying issues. As with the great depression, there would be a number of factors that caused such a devastating economic
“The housing market will get worse before it gets better” –James Wilson. The collapse of the United States housing market in in 2008 was one of the most devastating moments for the world economy. The United Sates being arguably the most important and powerful nation in the world really brought everyone down with this event. Canada was very lucky, thanks to good planning and proper preventatives to avoid what happened to the United States. There were many precursor events that occurred that showed a distinct path that led to the collapse of the housing market. People were buying house way out of their range because of low interest rates, the banks seemingly easily giving out massive loans and banks betting against the housing market. There were
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
Smith, Noah. “How to Fix America's Wealth Inequality: Teach Americans to Be Cheap.” The Atlantic. Atlantic Pub., 12 March 2013. Web. 06 April 2014. .
What caused the Great Recession that lasted from December 2007 to June 2009 in the United States? The United States a country with abundance of resources from jobs, education, money and power went from one day of economic balance to the next suffering major dimensions crisis. According to the Economic Policy Institute, it all began in 2007 from the credit crisis, which resulted in an 8 trillion dollar housing bubble (n.d.). This said by Economist analysts to attributed to the collapse in the United States. Even today, strong debates continue over major issues caused by the Great Recession in part over the accommodative federal monetary and fiscal policy (Economic Policy Institute, 2013). The Great Recession of 2007 – 2009 enlarges the longest financial crisis since the Great Depression of 1929 – 1932 that damaged the economy.
(Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question who is actually to blame for this financial fiasco.
In late 2005, the housing bubble burst, and housing began to decline in price. People who refinanced, particularly those who financed with variable interest rates, suddenly found their homes were valued at much less. The housing market became flooded with homes for sale, because the homeowners with variable rates and interest only loans could not continue to make their payments. Greenspan: The rise in the number of homes for sale caused further lowering of home values. Keep in mind that the main reason for the mortgage crisis is the high number of defaulted home loans, which triggered foreclosures and sell-offs.
“One out of every two hundred homes will be foreclosed every month, making 205,000 new families enter into foreclosure,” Mortgage Bankers Association. The housing industry in the United States is undergoing an unfortunate crisis. There are way too many homes being foreclosed, which cause a ripple of problems.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
Affordable housing in the United States describes sheltering units with well-adjusted housing costs for those living on an average, median income. The phrase usually implies to applied rental or purchaser housing within the financial means of lower-income ranges specific to the demographics of any given area. However, affordable housing does not include those living in social housing owned by government and non-profit organizations. More specifically, the targeted range for housing affordability sets below 30 percent of a household's annual income, including all applicable taxes, utility costs and home owners insurance rates. If the mean income per household breaches the 30 percent mark, then the agreed status becomes labeled as "unaffordable" by most recognizable financial institutions.
Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA.
The housing market crash was a response to a chain of businesses and people who believed that the old laws of banking were no longer important. Banks were no longer required to hold on to mortgages for 30 years which gave them the ability to sell off to other companies, without concern for the mortgage holders. David Harvey, a renowned geographer, warned us of this problem, stating that “labor markets and consumption function more as an outcome of search for financial solutions to the crisis-tendencies of capitalism, rather than the other way around. This would imply that the financial system has achieved a degree of autonomy from real production unprecedented in capitalism’s history, carrying capitalism into an era of equally unprecedented dangers” (Coe, Kelly, and Yeung, 2013)
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.