...rapidly. This is a "housing bubble." The danger in this situation is that the market will not be capable of sustaining the inflated prices, so the value of properties begins to come down, sometimes rapidly. Definition of a Housing Bubble * A "housing bubble" is a cyclical economic event where high trade volumes inflate prices, which ultimately become unsustainable, causing a lowering, or "crash" in values. Economic bubbles may be called by a variety of terms, including a speculative bubble, a market bubble or a balloon. Economic cycles of this nature are not exclusive to real estate. They have occurred throughout history in a variety of markets, including stocks, tulips and pottery. Contributing Factors to Unstable Housing Conditions * It could be argued that a housing bubble is really an example of a credit bubble. Although real estate is the underlying commodity, most house buyers use credit -- in the form of a mortgage -- to secure the property. Lax lending guidelines, rapidly inflating values, speculative buyers and the use of adjustable rate mortgages (ARMs), which can adjust to higher rates, are all factors in accelerating the likelihood of borrowers defaulting on their loans. The Effect a Housing Bubble Has on Local Markets * Tighter credit is likely to result after a housing bubble bursts; and although the effects following the downturn may have a broad effect on consumer purchasing power, the depth and duration of the housing bubble effects will vary drastically...
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...the United States. The same zeal leads to the company’s collapse and led to an extraordinary collapse of the US housing market. Mozilo and partner, David Loeb, founded Countrywide in 1969 in New York with the strategic intent of creating a nationwide mortgage-lending firm. The company opened a retail branch in California in 1974 and, by 1980, had 40 offices in eight states. In 1981, the pair launched a securities subsidiary, which would, specialized in the sale of mortgage-backed securities (MBSs). By 1985, Countrywide’s annual loan productions topped d $1 billion. This all took place on the backs of a booming U.S. housing market bubble which began in 1994 and ended in 2006. By the time of David Loeb’s death in 2003, the company’s annual mortgage originations reached to more than 2.5 million. The company’s financial services division originated more than 2.2 million loans totaling $408 billion by 2006. By 2007, the company had 661 branches in 48 states. Bank of America purchased the company in July of 2008 in a $4 billion all-stock transaction. How It All Started Because we live in a capitalist society, money is the driving force behind all of our daily living activities. Without money, it would be difficult to purchase much needed necessities such as food and clothes. One of the main necessities is the need for shelter. There are those who worked in the housing industry who sought to devise away make money while trying to provide the American dream to those who could not...
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...single-family and multi-family housing, both attached and unattached, on an individual basis and as part of planned developments or communities. In terms of sectors served, these products and services are provided for individuals and communities in the residential, commercial, industrial, hospitality, and leisure/resort sectors. These homes are made to appeal to homebuyers at various price points, degrees of urbanization and ruralization, demographic segments and stages of life. Competitive products are differentiated based on factors such as location, reputation, quality, features, design and price. Competition in the home building industry comes from a number of sources. First, the industry itself is widely fragmented, in terms of the number of players. At the peak of the industry’s prosperity, at the height of the recent housing bubble, the top ten players in the industry accounted for only 35% of its sales in dollars. The actual number of players considered legitimately “in the game” at a nationally-visible level numbers between 1,500 and 3,000 at any given time, depending on the industry’s prosperity level. This is a very large number for any one industry to have at this level. There are also innumerable very small local players. But, competition for the new single-family home building industry does not only come from within. Such competition also comes from the re-sale of existing single-family homes, new and existing condominiums, rental housing, and recently short sales...
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...Literature Review The literature that will follow will include the reasons for the global financial crisis and what steps the government is taking to overcome or recover from the crisis. One of the main reasons emphasized in the following text for the crisis is lack of effective regulations. Moreover the most important financial alteration that various committee’s around the world are taking is strengthening the regulatory requirements on the financial institutions. Hereafter it could be settled that government intervention could have played a huge role in avoiding the crisis. Many countries around the world have to decide whether to regulate or not to regulate their accounting standards. Supporters of regulation usually state that the free market notion states that accounting information is like an economic good so it is best to leave the markets to decide what and how much information is needed. This will help achieve efficient market system, however this kind of a system exists only in theory and not in reality, and so then what is the point of a free market system when it cannot be efficient? (Y. Hong, 2007) The rewards of free market system are realized only when it is executed in isolation. But in reality, markets cannot be left completely on its own and some regulation or government intervention is required. Government intervention even at its minimum will not be able to achieve efficient markets and thus it is better to have a well regulated system. Free market system...
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...The Housing Market and Macroeconomics Housing is an important part of macroeconomics. It contributes to our GDP through private investments and consumption spending. This includes purchasing a new or existing home and the costs of maintenance or upkeep on the property, in the form of services. Prior to the collapse of the housing bubble in 2007, the market had seen a steady increase in housing prices, and a decrease in interest rates, due to the increase in the federal funds rate (Arnold pg 379). As interest rates fell the demand for housing increased, thus increasing housing prices. But what caused the housing bubble? There are many different arguments to this question. During this period lending practices became less strict and we saw a move to less traditional lending patterns and unsound lending practices. Banks were lending with less documentation and a smaller required down payment, bringing homeowners perilously close to 100% loan-to-value ratios. Another cause for concern was the complex mortgage-backed securities and subprime mortgages of Fannie Mae and Freddie Mac. The last interesting argument for the cause of the bubble is housing starts and land-use regulations, which I want to discuss further. THE HOUSING BUBBLE In assessing the causes of the housing bubbles, many scholars have focused on the demand-side factors, such as low interest rates, zero down payments, and easy lending terms. However, as Randal O’Toole argues, the demand-side factors were more or less...
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...number of developments helped trigger the recent financial crisis, the most devastating were the significant losses on mortgage loans to subprime borrowers. The impact of these losses only became known shortly after house prices began to decline. In order to prevent a deep recession after the September 2011 terrorist attacks, the Federal Reserve drastically reduced interest rates. These low rates allowed citizens to continue taking out loans, including subprime mortgages. As the number of these loans increased in the mid 2000s, housing prices began to rise, creating a housing bubble. This housing bubble created wealth, with people borrowing against the equity in their homes through cash-out refinancing and home equity loans. This led to an increase in consumer spending, boosting sales and the overall economy. However, when bubble inevitably burst in 2007, many people lost equity in their biggest investment: their home. To make matters worse, the housing market was deeply involved with a huge portion of the American economy, from the construction industry to home decorating retailers to insurance companies, not to mention the mortgage-backed securities traded globally. The crisis not only affected individuals, but also caused panic in financial markets and encouraged investors to take their money out of risky mortgage securities. The snowballing effect of losses on bad loans and investments wiped out much of the capital of the banking system and reduced the credit available to...
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...reasons and impacts of the crisis as well as demonstrate the government responses. Furthermore, some lessons from the recession will be delivered at the end of the essay. It is very important to make clear of the crisis and integrate the financial theories with practice. II. Discussion The probable reason of the current financial crisis is recognised as the sub-prime mortgage segment of the USA for which were the results of long times of exceptionally loose monetary policy of some developed economies during the early period of last ten years (Mohan, 2009). After the internet bubble broken in the US more than ten years ago, most of the developed economies especially the US extremely eased the monetary policy. Only one percent of the Policy Rate had been announced in the summer of 2003 in the US (Mohan, 2009). This policy lasted for a long period and consequently stimulated the housing bubble of the America in the last a few years of 21st Century since it furthered investments and consumptions. The strong demands surpassed the output of the United States and there was an increase of the current account deficits of this country (McKibbin et al, 2009). The mild monetary policy and the extremely low interest rates stimulated the overconsumptions and to relax the standard of lending. As a result,...
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...Vol. 4, 2010-22 | August 5, 2010 | http://dx.doi.org/10.5018/economics-ejournal.ja.2010-22 Housing Wealth Isn’t Wealth Willem H. Buiter Citigroup, London Abstract A fall in house prices due to a change in fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a closed economy representative agent model (the special case when the birth rate is zero, of the Yaari-Blanchard OLG model used in the paper), there is no pure wealth effect on consumption from a change in house prices if this represents a change in their fundamental value. When the birth rate is positive, higher fundamental house prices driven by the housing demand of future generations will boost current consumption. There is a pure wealth effect on consumption from a change in house prices even in the representative agent model, if this reflects a change in the speculative bubble component of house prices. Two other channels through which a fall in house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing (the old, say) and those short housing (the young, say) and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope...
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...What is a “Housing Bubble”? Explain Subprime Lending and Why Many Believe That it is the Single Biggest Contributor to the Current Economic Malaise.7 December 2008 | | | | In this paper I will address the definition of a “housing bubble”, discuss subprime lending and why many believe that it is the single biggest contributor to the current economic state. A housing bubble, references real estate markets specifically. It is a type of economic bubble that occurs periodically in local or global real estate markets which is characterized by rapid increases in valuations of real property such as housing, until they reach unsustainable levels relative to income and other economic elements. These bubbles can occur in local and/or global markets. The recent US housing bubble, which peaked in early 2005, some of the major areas that were affected were California, Florida, the Northeast corridor and the Southwest markets. (Wikipedia) It is thought that the major contributor to this bubble was the subprime lending market. According to the financial dictionary, subprime lending occurs when lenders make loans to borrowers who would not ordinarily qualify for credit if customary underwriting practices were to apply. These loans tend to carry higher interest rates than those offered to creditworthy clients. These loans also sometimes assess additional fees such as pre-payment penalties. (The Financial Dictionary) According to the Housing and Urban Development...
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...real-world economics review, issue no. 46 The housing bubble and the financial crisis Dean Baker [Center for Economic and Policy Research, USA] Copyright: Dean Baker, 2008 The central element in the current financial crisis is the housing bubble. The irrational exuberance surrounding this bubble created an environment that was ripe for the cowboy financing that got Wall Street and the country into so much trouble. Of course the cowboy financing fed into the bubble, allowing it to grow to proportions that would not have been possible with a well-regulated financial system. This essay first describes the circumstances under which the bubble began to grow. It then discusses how financial innovations and the lack of a proper regulator structure allowed the bubble to grow to ever more dangerous levels and eventually to crash in a way that has placed unprecedented strain on the country’s financial system. The third part outlines key principles for reform of the financial system. The origins of the housing bubble The housing bubble in the United States grew up alongside the stock bubble in the mid-90s. The logic of the growth of the bubble is very simple. People who had increased their wealth substantially with the extraordinary run-up of stock prices were spending based on this increased wealth. This led to the consumption boom of the late 90s, with the savings rate out of disposable income falling from close to 5.0 percent in the middle of the decade to just over 2 percent by 2000...
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...Introduction IT industry and Globalisation 2008 Financial crisis and Impact on Indian IT sector Response steps taken by Indian IT firms (HCL, Infosys and TCS) Conclusion Introduction IT industry belongs to the servicing industry in India since India has not grown completely as Indigenous product developers in IT domain. So the growth and performance of Indian IT industry is completely attributed towards the institutions and organisations to which the software solutions or servicing is exported. It is very tough to comprehend and list out the types of macroeconomic shocks that an IT industry would face. The main reason for this would be IT sector as a whole doesn’t provide its software solutions not just one sector. It provides software solutions to almost all of the sectors like Manufacturing, Retail, Insurance, Banking, and Media, Entertainment so much more and still has scope in so many unexplored domains. Since the onset of globalisation in the early 90s, large capital influx and the crises that could be attributed with it have become one of the known risks. Large flows of capital into another country has created currency crisis in most of the countries. The most predominant of these shocks was recorded was in the East Asian countries. India never fell prey to these shocks and was effectively insulated from these shocks, until it has opened up its markets for investment by foreign players. The globalization and reforms of 90s...
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...Introduction For a while now, the price of houses in Australia have been rising and it doesn’t seem to be stopping any time soon. In this assessment, I’m going to be walking you through the many problems of Australia’s housing market and will offer solutions as to how we can fix it. Topic question: Generation Z will never be able to purchase their own homes. Why? How have house prices changed in Australia in the last 15 years? When surveyed, 85% of first homebuyers in Australia believed that an affordable home would be one priced at under $600,000 (Crommelin, n.d). However in Sydney, Australia’s most populous city, the median house price is over a whooping $1,000,000 (Crommelin, n.d). While the nation’s overall median house price had already surpassed $660,000 two years ago (The true extent of Australia’s rising property prices, 2015). With house prices quickly rising, it’s become clear to many, especially first home buyers, that the Great Australian Dream of owning your own home is now far off in the distance....
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...environment. Scout Mortgage, a loan mortgage broker since 1999 (Hellriegel & Slocum, 2009) has experienced the bullish and the bearish economic environment. In a work environment, the typical factors of change are driven by technological advancements which enable global-market-reach or globalization. With the increase of information technology and global communications, the world is communitively smaller. Any situation that affects a local market can be transformed into a national or international issue. The domestic housing sector economic downturn along with other Wall Street unethical and irresponsible actions have not only lead to a national but international recession and market collapse. In the case of Scout Mortgage, the technological advances have changed the way the company’s Loan Officers conducts business. Technology has automated a lot of task that where the responsibility of the loan officer. This decrease of responsibility along with the derailed housing market has forced Scout’s leadership to make an unwelcomed change. Change Reaction Typically, employees react negatively to change. Because of human nature and the fear of the unknown, which chain brings, it’s only natural that there is opposition to change. The over whelming...
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...‘Cheap House Is Not Allowed’ Will China’s real estate bubble burst? Since the onset of the global financial crisis in 2007, China has faced some critical problems linked with the excess of liquidity in its internal market, due to the stimulus plan launched by the Government to soften the effects of the crisis. As a result China is now fighting against a high rate of inflation (especially food prices) and a high cost of property. While the inflation issue has been partially solved in the first term of this year, the fear for the real-estate market trend is still alive. This essay aims to critically analyse the real estate market in China, which is also strictly linked with the health of this country’s economy, by examining this issue from two different perspectives: from the point of view of those scholars who believe that the Chinese bubble will burst and from the point of view of those who believe that the Chinese market is still safe. First of all the essay will give the historical and economic background of the price rises in the Chinese real estate market, from the birth of this important economic sector to the global financial crisis. Secondly, in the core part, this paper will explain the main theory regarding the possibility of the real estate bubble burst and the counter argument. To better understand the actual situation in China there will be also a short comparison with the burst of the American bubble in 2007. In the conclusive paragraph some predictions...
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... the collapse resulted in the total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to a global recession and contributing to the European sovereign-debt crisis. Most experts agree that one of the most important contributors to the recession was the collapse of the housing bubble. This led to an extremely high rate of loan defaults for people who probably should not have been given those loans in the first place. Due to the practice of predatory lending, many unsuspecting people were offered mortgages that they could not afford; however these people were convinced by lenders and realtors that they would be able to refinance those properties in a year or two and make tons of money. Since, the housing market was strong at the time, many people jumped on this opportunity, knowing that the property they were signing for was more than their budget could handle. Another part of the problem was the relationship between mortgages, the housing crisis and Wall Street. When Wall Street giants such as Bear Stearns, Lehman Brothers and Merrill Lynch jumped into the void left open by the collapse of the Government Sponsored...
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