The United States Housing Bubble

The United States housing bubble of the early 2000’s has led to the economic recession we are now finally recovering from. This bubble was created as a result from the dot.com boom of the 90’s and reached its peak in 2006. This is when housing prices reached their maximum potential, in early 2007 these prices began to fall and by the end of the year we had begun our dive into economic recession. The bubble collapsed as a result of many factors. During the boom financial institutions and banks were using securitization to finance mortgages. Securitization is when home mortgages are sliced and diced, then repackaged and sold as bonds on securities markets. This gave value to these mortgages and allowed banks to give out low interest rates. Another downfall of the housing market was banks giving out subprime mortgages. Subprime mortgages are mortgages provided to people for the entire value of a house on the basis of little or no documentation of their income or job status. This meant that banks were handing out mortgages to people who may not have been able to pay them off in the long run. In early 2007 these subprime mortgages and securities being sold equaled over a trillion dollars. This was fine as long as the value of houses continued to rise. Unfortunately this was not true, housing values fell drastically over this period. This was a result of the dot.com bubble burst, people lost money and jobs, which meant they were unable to pay their mortgages. The securities sold lost their value and effectively were turned into junk bonds. Junk bonds have little to no value as they are not backed by any sound financial product. Banks and financial institutions who had invested in these bonds lost a tremendous amount of money resulting in many of them to declare bankruptcy. This forced banks to tighten credit restrictions, reduce loans, and cut back sharply on new credit. This meant the average person faced many more obstacles in their attempt to finance their house. This gave an even lesser value to the bonds still on the securities markets. The Federal Reserve stepped in attempting to curb this spiraling downfall of the economy by lowering interest rates and extending credit. This is an example of expansionary monetary policy. However the value of stocks fell so sharply these could not keep up with the downward spiral. The United States Treasury and the Federal Reserve loaned trillions of dollars and bailed out financial institutions and banks this still was not enough to keep our economy from entering a deep recession in 2007 that we are now climbing out of.

http://www.msnbc.msn.com/id/42193084/ns/business-real_estate/?source=patrick.net#lead

Jack Dings