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Housing Market in U.S - Essay Example

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Housing Market in U.S Name Institution Housing Market in U.S Housing bubble refers to a run-up in housing prices fueled by demand, speculation, and the belief that recent history is an infallible forecast of the future. Essentially, housing bubbles start with an increase in demand in the face of limited supply that takes quite a long time to replenish and increase…
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Housing Market in U.S
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Housing Market in U.S

Download file to see previous pages... The bubble finally bursts. In housing bubble, very low interest rates and a consequent loosening of credit underwriting standards attract many borrowers in the market. In this case, a decline in demand due to high interest rates and a tightening of credit standards leads to bursting of the bubble. This paper discusses in depth about the rise and fall of the housing market in U.S. and its impact in the society. Scholarly research depicts that an economic bubble is difficult to identify with the exception of in hindsight. However, a number of cultural and economic factors have led to justification of the argument of several economists that a housing bubble existed in the U.S. As an economic bubble, the United States housing bubble grew up alongside the stock bubble in the mid-90s. Usually, low interest always motivates firms to borrow more and invest more. In this case, assets that are more productive match greater indebtedness (Shiller, 2006). However, the U.S housing market interest rates greatly differed with the investment. Although the country’s economy grew, many American families had to borrow more debt to refinance their mortgages and spend some of the proceeds. As long as the housing prices rose due to lower interest rates, the Americans ignored the growing indebtedness. An increase in demand in the supply of housing led to an ultimate increase in price. An incredible increase in price incorporated most affected areas into expectations that made homebuyers pay more than they would have otherwise thus making the expectations self-fulfilling. To attract many people in borrowing more money, credit standards were lowered thus fueling growth in the so-called subprime mortgages. Additionally, new products were invented lowering upfront payments and making it easier for individuals to take bigger mortgages. The biggest problem that arose from these mortgages was that some had negative amortization (Baker, 2002). This is because payments made by some of the borrowers did not even meet the interest due thus making the debt grow more. By 2002, the housing prices had shoot to nearly 30 percent even after adjusting for inflation. Statistical analysis evidences an impact of housing prices to the housing market upon a speculative bubble rather than the fundamentals. To fuel the housing market, Federal Reserve Board chairperson Alan Greenspan suggested that it was much better for homebuyers to procure houses on flexible rates rather than set rates since this would enable them pay for the house at ease. In 2003, homebuyers had the opportunity to afford larger mortgages due to the adjustable rates that were available at that moment. The lower interest rates hastened the run-up in house prices hence increasing at a supplementary 31.6 percent. On the other hand, the run-ups had predictable effect on savings and consumption. Consumption increased thus lowering the savings rate by 1 percent (Hardaway, 2011). Several factors contributed to the rise of the housing bubble. One major factor encompasses the desire of people to own too many houses. Many of the Americans despite their incapability of managing many houses went ahead and purchased them rather than renting houses, which is alternatively cheaper. Buying the houses for speculation rather than shelter was another insight to housing bubble. Due to the wealth possessed by most of the Americans, they decided to ...Download file to see next pagesRead More
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