The Housing Market Bubble Burst - Research Paper Example

The research paper "The Housing Market Bubble Burst" discusses why the housing market bubble burst in 2006 by analyzing the situation from the demand-supply perspective. The burgeoning demand got fuelled due to the availability of cheap credits from the lending institutions such as banks and others. Initial genuine demand from the needy people gets mixed up with the demand from the speculators who take the advantage of available cheap credits start inflating the demand. Demand surpassing supply, prices begin to jump.

This is further fueled by the burgeoning economy and good GDP numbers quarter to quarter misguiding masses and almost everybody that this is a genuine demand. The unfortunate part is that in a free economy such as the US, the government cannot intervene directly. Gradually, market reaches to a saturation level where there is no further demand. Meanwhile, supply also keeps pace with the demand. The phenomenon continues for a long time. Underlying weaknesses are not noticed immediately. As in the case of U.

S housing scenario, demand between 1993 and 2006 was inflated due to cheap credit that was available coupled with demand from investors aka speculators. It is difficult to estimate but experts say demand from speculators in any rising market is between 60-70 percent. Speculators will hold until they notice the first sign of weakness in the market. All the speculative demand will now take a reversal to book profit. Supply pressure will increase with less and less demand. A downward trend will take many into trappings.

A reversal in economy means increased unemployment rate and that will make many people insolvent to pay for their mortgage liabilities. This will eventually lead to foreclosures further increasing the supply manifold. A phenomenon continues until a point where prices are lucrative enough to cause supply matches demand. Prices remain afloat at this level for quite a long time. The point to emphasize here is that artificial demand cannot sustain the housing price for a long and that is what exactly happened.

(Thomas, 2006) What Next Given the phenomena of housing bubble burst from the peak of 2006, a question remains to be answered whether housing price has reached to its lowest or there is still a possibility of housing prices going further down to reach its old levels. There are many proponents of the theory that there would be another housing bubble bursting soon or for that matter to say that a downward phenomenon will continue. Ilargi (2011) argues that credit in the US is quickly vanishing.

He further states that Treasury and the Federal Reserve are lending our own money. Moreover, the future economic conditions in US will create a severe debt scarcity. The foremost reason given by several analysts is that of the debt saturation that the US economy has almost reached-- a point where total income cannot support total debt. It is also said that new debt cannot increase any GDP. According to them, the U.S household debt-income ratio was 136 percent in the first quarter of 2008, which currently is stated to be at 126 percent.

Before 2001, it was found to be just 70 percent. In order to reduce debt-income ratio to the reasonable level, current debt needs to be reduced by about $6-trillion. But so far only $600-billion of household debt has been reduced. This proves that American debt has reached to a saturation level and it cannot be increased further. On the other hand, that is being replaced with the in surmountable growth of US government debt. (Ilargi 2011) Housing