Collapse of the Housing Market - Essay Example

Collapse of the Housing Market The collapse of the housing market affected the global market environment particularly the financial organizations. The U.S. sub prime fiasco was behind the collapse of the housing market. The topic is very much relevant as collapse of the U.S. housing market had repercussions leading to worldwide recessionary trends because of globalization. It all started when financial companies started depending too much on the innovation in the blind faith that it will yield returns.

The symptoms of the malaise started emerging in the US mortgage business first. The cracks appeared in the banking system three years later. Housing prices started falling in the year 2005. Initial symptom appeared in the market for sub prime residential mortgage-supported securities as investment demand shrank in 2006. Cracks in financial market became wide open in June 2007 with the failure to meet the lenders’ call on Collateralised Debt Obligations (CDOs) by hedge funds for subprime loans.

In a way, it was the overconfidence of the mortgage brokers who went on selling loans to home buyers in the sub prime sector of the housing market due to market hype (Financial World 26-28). The recessionary trends appeared with the sub prime lending to home borrowers. The crisis started from Cleveland where loans in huge amount were cleared without verifying income and documents by the mortgage brokers. Refinancing was allowed on the condition that new sub prime mortgage would start after two years at double the prevailing interest rates.

The crisis deepened when the whole of America came under its influence as property prices touched a new height; as a result, demand for owning property increased because of mortgage brokers and refinancing. When the interest reset period ended after two years, interest rates went higher because Fed interest rates also increased on which sub prime mortgage interests were based (BBC News 9-13). Housing prices started falling hugely after the boom period ended. The downfall in housing boom came because a wave of repossessions was behind this trend.

Banks withdrew approving home loan applications to cover risks to their investments. Being compelled to dry up the whole sale bond market and save their balance sheets from the adverse affects, banks started shrinking their home loan portfolio. The Pension Funds suffered the severe losses being the prime purchasers of sub prime mortgage bonds. As the banks had hidden their holdings of sub prime mortgages in off-balance sheet instruments such as “structured investment vehicles” or SIV’s, they were unwilling to bear the losses (BBC News 9-13).

The high growth rate resulted in financial imbalance in consumer markets like America where deficit of liquidity was immensely felt. Availability of cheap credit created a boom in consumer market and fuelled the housing market. As mortgage market didn’t follow strict rules while passing home loan in America, it deepened the crisis further (HSBC Holdings plc 10). Once the housing market led to the recession worldwide, it was not possible to correct the errors at once; it took three-to-five years to bring back the derailed economy back on its track.

The whole world would not have borne the after-effects caused by the collapse of the housing market had the U.S. regulators taken precautions before letting loose the reins of economy. Works Cited “From bust to boom and back again.” Financial World. December 2008: 26-28. HSBC Holdings Plc. 2008. Annual Report and Accounts ’Strength, diversity and resilience.’ 16 March 2011 . “The downturn in facts and figures: US sub-prime.” BBC News. 21 November 2007: 9-14.