...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...
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...According to Wikipedia a housing bubble is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline. Four years into the housing bubble downturn, much of the country remains hopelessly confused about what happened, why it happened and who is to blame. In my research paper I will try and demonstrate what a housing bubble is, some of the reasons for the bubble, was it preventable, how it kept growing, how it burst and how it has affected our economy. By definition a housing bubble is a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices. As with most economic bubbles, it eventually bursts, resulting in a quick decline in prices. The end of a housing bubble is hard to predict given the fact that economic conditions can change without warning. If a housing bubble swells to an extremely high level, the aftermath of a burst may set the housing market back years. There is little consensus as to the cause of the housing bubble that precipitated the financial crisis of 2008. Numerous explanations exist: misguided monetary policy; a global savings surplus; government policies encouraging affordable homeownership; irrational consumer expectations of rising housing prices; inelastic housing supply. Some explanations...
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...biggest bubbles in the real estate market in the decade. However, we do not see any slowdown in these cities. As of today, the property prices seem to keep on growing forever. Will China’s housing bubble pop? Compare the housing bubbles in the United States with that in China * A brief background information about the housing market in US before it crashed down * Elaborate on China’s current housing market and see how close is it to the housing market condition in the US Different views on China’s housing bubble * Optimists think that even if the housing market crashes down in the near future, it will not create another global financial disaster * Some think that the bubble will never crash under the guidance of our communist party * Some debate on the implementation of the new policies Conclusion: China and the world have to learn a lesson, and try to maintain a healthy, long-term economic sustainability. Will China’s housing bubble pop? Is it just merely a matter of time when the housing market comes to a crash, or will it not at all? Should a burst of the bubbles cause another worldwide economic downturn and probably a global recession? These are probably the most heated debates by the economists of the world today. The soaring property prices in China’s coastline and major cities such as Beijing, Shanghai, Shenzhen, and Dalian with a mortgage to average household’s annual income ratio of as high as 35% has formed the biggest bubbles in the real...
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...examine the nature of housing bubbles and how housing prices are affected by the elasticity of housing supply. They begin by citing from literature to show that price movements of assets, including markets, include an irrational exuberance element as well as their fundamental valuations; this leads to the difficulty in explaining the significant variations in housing prices between 1999 and 2005. As a result, instead of developing a test to detect the presence of a housing bubble, the authors propose to analyze the nature of this bubble; this is especially in light of the fact that housing supply and pricing influence construction activities as well as population immigration, thus impacting general welfare. They develop an endogenous model for asset bubbles by making it dependent on supply inelasticity – the model predicts that when a bubble bursts, houses that are constructed during the bubble witness their prices falling to lower than their pre-bubble values. Further, they also perform an empirical analysis of data on prices, construction activities and supply elasticity of houses during two boom-and-bust cycles (during the 1980s and post-1996); they also study the differences in pricing and supply levels during these cycles. It is observed that the premise of the paper is well established, and the proposed models clearly defined; the predictions from the models are identified properly in terms of stated elastic markets (Orlando and Phoenix), and a previous housing bust (1989-1996)...
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...The issue of whom to blame for the 2000-2006 housing bubble has shifted from an economic to a political discussion. As with a lot of political issues, each party seems to think they know who’s to blame for issues within the U.S. economy. One theory states that through things like the Community Readjustment Act and the Affordable Housing mission, the government should receive the blame. Other economists believe that the U.S. government did its best in the to make the American Dream of owning a home more accessible to everyone, banks took advantage of reduced loaning standards and lent out money they knew individuals could never repay. When it comes to the conservative opinion, individuals believe the federal government caused the housing bubble....
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...Macroeconomics Commentary Canada's strong job growth has come to an end in January as major firms announce layoffs amid other signs of a cooling economy. The nation's unemployment rate dropped to 7% from 7.1% due to a shrinking labour force while on the other hand, Canada's trade deficit, decrease in government spending, as well as consumer spending have also contributed slow growth in aggregate demand. This commentary will evaluate the implications of the aforementioned scenario on firms, and consumers. Aggregate demand is defined as the total planned level of spending on domestic goods and services within the borders of an economy at various average price levels. The components that affect aggregate demand are consumer expenditures, investments, government spending, and exports. Similarly, aggregate supply is the total supply of goods and services of an economy at a given average price level. A labour force consists of both employed and unemployed workers, with the unemployed defined as individuals who actively search for jobs and cannot find one. The unemployment rate is the ratio of the number of unemployed workers versus the total size of the labour force. Figure 1.0 – Changes in Canada’s aggregate supply and aggregate demand In figure 1.0, the intermediate Keynesian aggregate supply curve illustrates aggregate supply falling back from AS1 to AS2 as “Canada’s labour force shrank by 57, 500.” At the same time, aggregate demand has not increased...
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...Contents 1. Introduction to Economics 1 What is Economics? 2 Studying of Choice in a World of Scarcity 4 The Cost-Benefit Principles 6 Absolute Advantage vs. Comparative Advantage 9 2. Law of Demand and Supply 13 Introduction to Demand and Supply 14 The Demand Curve 15 The Supply Curve 18 Market Equilibrium 21 Shift in Demand 25 Shift in Supply 26 3. Elasticity of Demand and Supply 29 Price Elasticity of Demand 30 Types of Elasticity of Demand 31 Determinants of Price Elasticity of Demand 34 Price Elasticity of Supply 38 Types of Elasticity of Supply 39 Determinants of Price Elasticity of Supply 41 4. International Trade 44 Introduction to International Trade 45 International Trade Restrictions 48 Arguments in Favour of Restricting Trade 53 Non-economic Arguments for Restricting Trade 56 Problems with Trade Protection 58 5. Market Structures 62 Introduction to Market Structure 63 Perfect Competition 65 Monopoly 68 Monopolistic Competition 72 6. Macroeconomics – GDP, Unemployment, Money and Central Bank 77 Introduction to Macroeconomics 78 GDP 81 Unemployment 84 Inflation 89 [pic] |Principles of Economics | |BM2 | A WORD OF WELCOME ...
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...The Housing Market and Macroeconomics Housing is an important part of macroeconomics. It contributes to our GDP through private investments and consumption spending. This includes purchasing a new or existing home and the costs of maintenance or upkeep on the property, in the form of services. Prior to the collapse of the housing bubble in 2007, the market had seen a steady increase in housing prices, and a decrease in interest rates, due to the increase in the federal funds rate (Arnold pg 379). As interest rates fell the demand for housing increased, thus increasing housing prices. But what caused the housing bubble? There are many different arguments to this question. During this period lending practices became less strict and we saw a move to less traditional lending patterns and unsound lending practices. Banks were lending with less documentation and a smaller required down payment, bringing homeowners perilously close to 100% loan-to-value ratios. Another cause for concern was the complex mortgage-backed securities and subprime mortgages of Fannie Mae and Freddie Mac. The last interesting argument for the cause of the bubble is housing starts and land-use regulations, which I want to discuss further. THE HOUSING BUBBLE In assessing the causes of the housing bubbles, many scholars have focused on the demand-side factors, such as low interest rates, zero down payments, and easy lending terms. However, as Randal O’Toole argues, the demand-side factors were more or less...
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...real-world economics review, issue no. 46 The housing bubble and the financial crisis Dean Baker [Center for Economic and Policy Research, USA] Copyright: Dean Baker, 2008 The central element in the current financial crisis is the housing bubble. The irrational exuberance surrounding this bubble created an environment that was ripe for the cowboy financing that got Wall Street and the country into so much trouble. Of course the cowboy financing fed into the bubble, allowing it to grow to proportions that would not have been possible with a well-regulated financial system. This essay first describes the circumstances under which the bubble began to grow. It then discusses how financial innovations and the lack of a proper regulator structure allowed the bubble to grow to ever more dangerous levels and eventually to crash in a way that has placed unprecedented strain on the country’s financial system. The third part outlines key principles for reform of the financial system. The origins of the housing bubble The housing bubble in the United States grew up alongside the stock bubble in the mid-90s. The logic of the growth of the bubble is very simple. People who had increased their wealth substantially with the extraordinary run-up of stock prices were spending based on this increased wealth. This led to the consumption boom of the late 90s, with the savings rate out of disposable income falling from close to 5.0 percent in the middle of the decade to just over 2 percent by 2000...
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...the United States. The same zeal leads to the company’s collapse and led to an extraordinary collapse of the US housing market. Mozilo and partner, David Loeb, founded Countrywide in 1969 in New York with the strategic intent of creating a nationwide mortgage-lending firm. The company opened a retail branch in California in 1974 and, by 1980, had 40 offices in eight states. In 1981, the pair launched a securities subsidiary, which would, specialized in the sale of mortgage-backed securities (MBSs). By 1985, Countrywide’s annual loan productions topped d $1 billion. This all took place on the backs of a booming U.S. housing market bubble which began in 1994 and ended in 2006. By the time of David Loeb’s death in 2003, the company’s annual mortgage originations reached to more than 2.5 million. The company’s financial services division originated more than 2.2 million loans totaling $408 billion by 2006. By 2007, the company had 661 branches in 48 states. Bank of America purchased the company in July of 2008 in a $4 billion all-stock transaction. How It All Started Because we live in a capitalist society, money is the driving force behind all of our daily living activities. Without money, it would be difficult to purchase much needed necessities such as food and clothes. One of the main necessities is the need for shelter. There are those who worked in the housing industry who sought to devise away make money while trying to provide the American dream to those who could not...
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...number of developments helped trigger the recent financial crisis, the most devastating were the significant losses on mortgage loans to subprime borrowers. The impact of these losses only became known shortly after house prices began to decline. In order to prevent a deep recession after the September 2011 terrorist attacks, the Federal Reserve drastically reduced interest rates. These low rates allowed citizens to continue taking out loans, including subprime mortgages. As the number of these loans increased in the mid 2000s, housing prices began to rise, creating a housing bubble. This housing bubble created wealth, with people borrowing against the equity in their homes through cash-out refinancing and home equity loans. This led to an increase in consumer spending, boosting sales and the overall economy. However, when bubble inevitably burst in 2007, many people lost equity in their biggest investment: their home. To make matters worse, the housing market was deeply involved with a huge portion of the American economy, from the construction industry to home decorating retailers to insurance companies, not to mention the mortgage-backed securities traded globally. The crisis not only affected individuals, but also caused panic in financial markets and encouraged investors to take their money out of risky mortgage securities. The snowballing effect of losses on bad loans and investments wiped out much of the capital of the banking system and reduced the credit available to...
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...Key words: Housing market, price, increase, decrease, the bubble in housing market Body: In 2010, from January to October, the investment of national real estate is 3.807 trillion Yuan with an increase of 36.5%, which is 105.1% of the annual investment, 3.623 trillion Yuan in 2009. In the first half of 2010, in the context of macroeconomic stabilization and recovery, the Central Government has issued a series of regulatory policies toward the housing price which increases too fast. The severity and enforcement of these control policies of the housing market are both higher than previously. The performance of the housing market 1. Consumers now are likely to wait and observe the housing market, which leads that the housing price in some cities has a small decline. There are many measures being taken by government to protect the public interest, so many people would like to wait and see how the housing market will develop. Most of them are not willing to accept the current expensive housing price, and they do not want to be entangled into the housing market after they finished their purchase with expensive cost. Therefore, the phenomenon has been speared out, and more and more people are waiting for the development of the housing market. The trades of housing market in some cities have decreased obviously. 2. The real estate is very popular as a means of investment. The domestic economy keeps increasing, at the same time the investment of the real estate becomes...
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...‘Cheap House Is Not Allowed’ Will China’s real estate bubble burst? Since the onset of the global financial crisis in 2007, China has faced some critical problems linked with the excess of liquidity in its internal market, due to the stimulus plan launched by the Government to soften the effects of the crisis. As a result China is now fighting against a high rate of inflation (especially food prices) and a high cost of property. While the inflation issue has been partially solved in the first term of this year, the fear for the real-estate market trend is still alive. This essay aims to critically analyse the real estate market in China, which is also strictly linked with the health of this country’s economy, by examining this issue from two different perspectives: from the point of view of those scholars who believe that the Chinese bubble will burst and from the point of view of those who believe that the Chinese market is still safe. First of all the essay will give the historical and economic background of the price rises in the Chinese real estate market, from the birth of this important economic sector to the global financial crisis. Secondly, in the core part, this paper will explain the main theory regarding the possibility of the real estate bubble burst and the counter argument. To better understand the actual situation in China there will be also a short comparison with the burst of the American bubble in 2007. In the conclusive paragraph some predictions...
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...reasons and impacts of the crisis as well as demonstrate the government responses. Furthermore, some lessons from the recession will be delivered at the end of the essay. It is very important to make clear of the crisis and integrate the financial theories with practice. II. Discussion The probable reason of the current financial crisis is recognised as the sub-prime mortgage segment of the USA for which were the results of long times of exceptionally loose monetary policy of some developed economies during the early period of last ten years (Mohan, 2009). After the internet bubble broken in the US more than ten years ago, most of the developed economies especially the US extremely eased the monetary policy. Only one percent of the Policy Rate had been announced in the summer of 2003 in the US (Mohan, 2009). This policy lasted for a long period and consequently stimulated the housing bubble of the America in the last a few years of 21st Century since it furthered investments and consumptions. The strong demands surpassed the output of the United States and there was an increase of the current account deficits of this country (McKibbin et al, 2009). The mild monetary policy and the extremely low interest rates stimulated the overconsumptions and to relax the standard of lending. As a result,...
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...homeowners lost their home and investments. amiliarity ARMs (Pritchard) let’s review the Perception, Attribution, and Learning (Schermerhorn, 2012 p. 77) as it pertains to the Home Mortgage Crisis: When the Housing Crisis began, many people opined as to what caused the calamity; whom is to blamed? What reinforcements sustained this behavior (95)? How to discourage this behavior in the future? Individuals with good credit and current mortgages “Perceivers” (77) , blamed the crisis on individuals “Perceived”(77) to be lacking the financial fortitude to keep their mortgage current. The Perceivers believed that they were financially astute and possessed the character traits required to manage their personal finances. They were not empathetic to the plight of millions of homeowners, who have lost, or were losing their primary dwelling through foreclosure. Their prevailing, stereotypic perception of the borrowers, were that their character was flawed, and unethical behavior should not positively reinforced. The Lending Institutions’ predatory practices continue today, without ramification for their unprincipled behavior. . Reflective Observation The Fundamental attributes (87) contributing to the housing crisis had little to do with the content of a loan application. The bubble burst when the first wave of foreclosures came in 2006 and 2007. Many homeowners did not or could not refinance their adjustable-rate mortgage and could not afford the new higher adjusted payment. (Brimble)...
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