Final project

US Property Crisis in 2008

A very important event in US recent history is the housing bubble (unrealistic boom in property market) which grew up in the 1990s. People who had increased their wealth with the extraordinary profits of stock prices started buying bigger and better houses as an investment.  They were happily buying more and more property, as an investment for the future, so they could sell it later at a much higher selling price. This increase in demand had a great effect on the housing bubble because such high demand for houses could not be met in a short time.

Therefore it led to a huge increase in prices in the housing market. In addition, the economy was very slow after  the 2001 recession. Many people were losing jobs right through 2002 and 2003, so they could not pay the monthly installments of their house loans (mortgages). This was becoming a major issue in almost every American’s life. The weakness of the recovery of loan money resulted in the decision of the Federal Reserve Board to cut interest rates, to ease the problem of paying loans with higher rates.

This step actually backfired as such extraordinarily low interest rates led people to borrow further loans to buy more houses.   Due to greater increase in demand for houses, the prices of houses increased. From 2002 to 2006, the house prices rose by 31.6 percent. This fueled even more construction, with housing numbers eventually reaching 2,070,000 in 2005, more than 50 percent more  houses than 5 years ago. More and more houses were being built and there was no one to control the builders and companies giving them loans.  This was in 2007, as the building boom led to so much over supply of houses that prices could no longer be controlled and there was a sharp decline in prices.    http://www.investmentu.com/2012/February/housing-market-crisis.html

Another reason for falling prices was that more people were becoming unemployed and there was a time when foreclosures (people leaving the houses empty with loans unpaid) became common. The foreclosures took place when people realized that they had to pay more than the value of their home and they were not able to pay any more due to loss of jobs.

By the middle of 2007, the prices kept on falling due to non-payment by homeowners and foreclosures. This process accelerated in 2008 and it became a major issue for the US people and government. Increased foreclosures   led to a crisis in August 2008 for the highest unpaid mortgage, credit and foreign bank markets. In the words of the US Treasury, the bursting housing bubble was the most significant risk to the US economy.

Any collapse of the U.S. housing bubble had a direct impact not only on home valuations, but the nation's mortgage markets, home builders, real estate, home supply businesses, Wall Street funds held by large investors and foreign banks, increasing the risk of a nationwide recession. Concerns about the impact of the collapsing housing and credit/loan markets on the U.S. economy caused President George W. Bush and the Chairman of the Federal Reserve Ben Bernanke to announce a limited bailout (financial help in cash) for homeowners who were unable to pay their mortgage loans. The US government wanted to help institutions and common people for payment of their loans, but the amounts were too huge so that even that seemed quite impossible.  The effects of US property bubble could be felt in other countries too. In many countries, prices of the property fell sharply.  Things seemed completely out of control and there were demands by the public for immediate government help. http://www.biggerpockets.com/renewsblog/2008/02/27/us-real-estate-crisis-causing-record-economic-distress/

The following graph shows how the housing prices went up from 1990 till 2007. Then, suddenly a sharp downward slope from the year 2008.

Source: http://en.wikipedia.org/wiki/File:Median_and_Average_Sales_Prices_of_New_Homes_Sold_in_United_States_1963-2008_annual.png

The government of the U.S looked into this big problem as they tried to help banks, which were not receiving loan money from people. They were paid huge amounts of money.

For example, in 2008, the US government put in over $900 billion to special loans and financial help with over half going to government sponsored institutions, Fannie Mae and Freddie Mac, and the Federal Housing Administration (a US Government agency).  In  2009, the Treasury Department made an announcement that it would be supporting Fannie Mae and Freddie Mac unlimited for the next three years, which were already facing losses of more than $400 billion. The Treasury was also criticized for such a huge spending, which was not allowed by the US constitution, and for violating the Housing and Economic Recovery Act of 2008.

The foreclosures problems continued in later years too, as gradually, people started paying back their loans. However, the main crisis period was over by the end of 2010. Still there are some effects felt as some foreclosure cases are going on, but the severity of the crisis is almost gone. 

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reference :

"File:Median and Average Sales Prices of New Homes Sold in United States 1963-2008 annual.png - Wikipedia, the free encyclopedia." Wikipedia, the free encyclopedia. N.p., n.d. Web. 26 May 2013. <http://en.wikipedia.org/wiki/File:Median_and_Average_Sales_Prices_of_New_Homes_Sold_in_United_States_1963-2008_annual.png>.

"U.S. Housing Crisis: Facts About The Crash - Business Insider." Business Insider. N.p., n.d. Web. 26 May 2013. <http://www.businessinsider.com/us-real-estate-crisis-facts-2011-3?op=1>.

Jenkins, Jason. "Understanding the 2008 Housing Market Crisis." Investment U - Investment Research with a Contrarian Point of View. N.p., n.d. Web. 26 May 2013. <http://www.investmentu.com/2012/February/housing-market-crisis.html>.

"Housing Finance and the 2008 Financial Crisis | Downsizing the Federal Government." Downsizing the Federal Government. N.p., n.d. Web. 26 May 2013. <http://www.downsizinggovernment.org/hud/housing-finance-2008-financial-crisis>.

"US Real Estate Crisis Causing Record Economic Distress." BiggerPockets Real Estate Investing Social Network: Connect & Learn. N.p., n.d. Web. 26 May 2013. <http://www.biggerpockets.com/renewsblog/2008/02/27/us-real-estate-crisis-causing-record-economic-distress/>.

"Real Estate Crisis - Housing Bubble - World Crisis webpage." Global Financial Crisis - World Ecomonic Crisis website. N.p., n.d. Web. 26 May 2013. <http://www.world-crisis.net/realestate-crisis.html>.