2007
U.S Housing Market bubble and crash

After years of quantitative easing and loose government regulation, the U.S Housing market finally revealed that it turned into a bubble and finally collapsed. Houses are assets that are considered hard to liquidate compared to other assets such as stocks and yet real estate was traded not because people need roofs on top of their heads but simply by pure speculation. The housing markets have been far less volatile than that of the stock market in fact, house prices remained at a steady upward direction since the end of WW2 but not until it started go out of control in the 2000s. The world has actually forgotten the lessons learned from numerous bubbles that occured throught history. The most recent one similar to the housing market bubble is the Japanese asset price bubble in the 1980s where house prices shot up to the point that it became too expensive for the average Japanese citizen to afford.

The combination of declining interest rates and government pressure to lenders, made the housing market at first a very affordable venture. The Bush administration further pushed this in 2003 with the American Dream Downpayment Act this subsidized first time homebuyers and asked lenders to ease the pressure on subprime borrowers to provide full personal and financial documentation to obtain a loan. Fanny Mae and Freddie Mac were also put under pressure to open its loan vaults to subprime clients through a government guarantee of the loans. With all the systems in place, this jump started the housing market speculation where the ease of obtaining a loan supplied the needed demand for real estate brokers to finally raise prices in increments, slowly. As house prices went up, the Federal Reserve's concern of rampant inflation caused by this free floating money from easy loans prompted them to slowly tighten interest rates. Most subprime borrowers are on variable interest rate loans which means, it is very affordable if the interest rate is low but as the Fed slowly increased rates to control inflation, their monthly payments also increased to the point that they could no longer afford to pay the mortgage and still have something left for their other basic expenses. House prices in 2006 at its peak has gone up to ridiculously high levels that most lenders are not willing to make loans. The extremely high house prices and the lack of available money from lenders drastically reduced demand for new houses and, combined with the defaulting subprime borrowers, the balance sheets of numerous subprime lenders were permanently damaged.

Some events that lead into the confirmation of the crash started with Freddie Mac's announcement that it would no longer purchase risky subprime loans followed by the subprime lender New Century Financial's bankruptcy. By August of 2007, subprime loans are extinct, finding one is mostly a fantasy American Home Mortgage also filed for bankruptcy.

 












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