Essays on Causes of the housing market crisis

At this point, it is important to understand the major causes of the housing market crisis which actually made the housing market bubble to burst. First of all, it is worth mentioning the fact that the steadily rising housing prices, which eventually became exorbitantly high and failed to match the real cost of houses, were one of the major causes of the crisis in the housing market. In fact, housing prices has reached their peak in the mid-2000 compared to housing prices in the past (See App. Table 1 and Table 2) As the prices reached the highest point making mortgages unaffordable for many home owners, they have started to decline that made mortgages consistently higher that the real value of real estate. At this point, the deterioration of the economic situation in the US was the result of the aggravating situation in the housing market.

At this point, speculations in the housing market provoked the rise of housing prices and overheating of the housing market. In fact, housing prices did not rise spontaneously until 2007. Instead, the skyrocketing price of houses in the US was the result of speculations. The housing industry was attractive for investment and many individuals and companies invested in the housing market. However, the rise of housing prices became unreasonable to the extent that the housing bubble has started to burst.

The rise of housing prices and dynamic development of the housing market, which has led to the unreasonably high prices, was stimulated by bank loans. In fact, banks provided customers with affordable and attractive loans that stimulated sales and purchases in the housing market even more. In such a way, bank loans available to individuals stimulated the fast development of the housing market and the rise of housing prices. However, bank loans were granted to Americans without reasonable justification of such substantial investments in the housing market. The gap between real value of houses in the US and the current price grew enormous to the extent that it became obvious and unaffordable as customers could not pay such a high price any more, while the decline of sales affected the financial market, banks and insurance companies.

Home owners attempted to refinance their loans taking loans in new banks that aggravated their position and made loans eventually unaffordable, when home owners could not refinance their loans anymore and banks has started to run out of money as many home owners stopped payoffs. Many home owners could not pay their mortgages anymore. As a result, the housing market faced a profound downfall as home owners could not pay their mortgages and many bank loans were at risk. In such a situation, banks suffered substantial financial losses.
Consequences of the housing market crisis

The decline of the housing market and the profound crisis in the construction industry were the first and obvious effects of the housing market crisis. In fact, the bursting bubble of real estate mortgages and loans slowed down the development of the housing industry and construction industry. At this point, it is worth mentioning the fact that the housing market of the US faced a profound recession and the construction of new houses became just unnecessary. As a result, the construction industry, companies operating in this industry and their employees were left without work. In this regard, specialists point out that residential construction has subtracted from growth in gross domestic product, the broadest measure of all goods and services produced in the economy, in four of the seven quarters since the recession ended in June 2009 (Kalita & Timiraos, 2011). That is a contrast with the past three recoveries when housing added to economic growth for at least a year and half following the downturns in the 1980s, 1990s and early 2000s (Kalita & Timiraos, 2011). Therefore, the crisis in the housing market lasts longer than in the past and the housing industry still fails to recover.

Furthermore, the housing market provoked the panic in financial market that led to the financial crisis. In fact, the housing market affected consistently banking industry and provoked the financial crisis. In such a situation, the panic in the financial market affected the national economy as well as economy of other countries as well. Home owners could not pay off their debts and substantial funds have been lost since the beginning of the economic recession.

Home owners could not pay their mortgages. Therefore, many banks suffered substantial financial losses as their loans remained unpaid by their clients. Similarly, insurance companies also faced substantial financial losses as their customers run bankrupt and the financial crisis aggravated. Specialists point out that next domino likely to topple is the so-called private-mortgage-insurance industry, which permits buyers to purchase homes without making a full 20% down payment. Private mortgage insurance covers the first 25% of a mortgage’s value against default, plus accrued interest. Some $700 billion of ILS. mortgages carry such insurance, with most of it owned by Fannie Mae and Freddie Mac and backed by the federal government (Laing, 2011). In such a situation, insurance companies and their financial problems aggravated the situation in the financial market even more.

In such a situation, the national economy slipped to recession that has turned out to be the deepest economic crisis since the Great Depression (Latham & Braun, 2008). In fact, the housing market affected the banking and insurance industry, provoked the financial crisis, the construction industry and related industry. As a result, the US economy suffered from a considerable downturn. In addition, many Americans became homeless or ran bankrupt and so did many companies, while a large number of Americans became jobless. In such a situation, the US economy faced considerable macroeconomic challenges, such as the high unemployment rate and inflation along with the falling GDP.
The economic recession in the US affected the global economy and the economic crisis spreads worldwide. As the US economy was closely integrated in the global economy the deterioration of the situation in the housing and financial markets of the US as well as in the US economy at large. In such a way, the economic recession provoked by the bursting housing bubble in the US has started to spread worldwide. Therefore, the recovery of the housing market is essential for the recovery of the US and global economy.

Conclusion

Thus, taking into account all above mentioned, it is important to place emphasis on the fact that the bursting bubble of real estate mortgages and loans in the US has a considerable impact on the economy development of the US and the world and affected millions of people. At the same time, the major cause of the housing crisis was speculations and ineffective credit policies conducted by banks because home owners purchased homes at unreasonably high price expecting to refinance their loans in another bank but when the housing prices reached their peak, the downturn in the housing market has started. The downturn in the housing market affected the banking and insurance industry along with millions of home owners, who could not pay their mortgages. In addition, the housing market crisis provoked the financial crisis and led to the large-scale economic recession in the US and the world. Therefore, reasonable loan policies and regulation of the housing market could have prevented speculations and bursting bubble of real estate mortgages and loans in the US and all the negative effects of the housing market crisis.