2006 New York Housing Market Bubble - Research Paper Example

Download file to see previous pages... Subsequently, the rapid increases lead to decreases in home values and mortgage debt charge that exceeds worth of property. Housing bubbles are usually identified after a market correction since house bubbles do not burst the way stock markets do. A housing bubble can occur when there is excess demand in housing with the supply that does not increase. There was a housing market bubble in New York that reached its climax in 2006. The housing bubble was attributed to rise in subprime lending, poor policies, poor taxation, emergence of new lenders, underwriters and mortgage brokers and credit raters. The housing bubble in New York took a period of ten years before it was realized. Because of the housing bubble in New York, the consumers, lenders and the entire economy were affected. The bubble was identified in New York by housing prices rising faster than the consumer prices, which was attributed to the increased demand for houses and a non-increasing supply side in housing (Frank, 2009). Housing Market Bubble and New York City economy in 2006 During a housing boom, there is a substantial rise in real output as investment in houses and their related investments increases. There tends to be more jobs in the housing sector, and the investment gives out more economic output. Of course, the assets for extra housing activity have to be generated from somewhere, which means less activity for the other sectors of economy than it could have otherwise occurred. On bursting of a housing boom, new housing begins to fall, and the process is reversed. Another aspect of house pricing that affect the economy is that of household wealth effect and the related consumption. In times when house price increases, owners of houses for investments become wealthier and in the end increase their consumption spending since consumption is dependent on a person’s wealth. The wealthier an individual becomes, the more he has the willing power to consume and thus, the more he will consume (Frank, 2009). The New York economy experienced changes due to the housing bubble. Before the market bubble came to be realized in the year 2006, the revenues related to real estates had increased tremendously, but with the housing market bubble, the revenues collected in the form of taxes from the real estates decreased drastically. The decrease in tax revenues could be attributed to the weaknesses in carrying out the housing transactions. There was a decrease in the growth of GDP since it grew at a lower level from the previous years. Private investments fell to 3.3% with a considerable increase in all sectors of private investments, but investments in inventories decreased significantly (Wiedemer, 2006). Consumer spending was highly affected by the housing bubble. As the mortgage interest rates rose, the consumption spending was decreased. However, since the interest rates rose slowly and the corresponding wealth effect was not random, the overall effect on the economy was not immediate, but took time before it could be noticed. An attempt to determine the value of houses rated NYC housing value as being 25% above the sustainable level. Usually, the reduced consumer spending may be because of the consumers not having trust in the housing investments, where they experienced a mix up of prices; price increases and price reductions. The consumers felt less wealthy after the bubble burst and they responded by cutting back spending (Wiedemer, 2006). During times of house bubbling, there were an increased number of brokers and underwriters, these made the real estate trade become easier with their role in shortening the transactions between purchasers and sellers of real ...Download file to see next pagesRead More