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, during the period when the “housing bubble” was developing the number of subprime loans drastically increase and were distributed at a disproportionate rate to minorities. These loans were recorded to have been distributed at a rate 1.5 times greater than that of the white population. These mortgages are known to have been given to upper-income African Americans who should have qualified...