Economic Downturn
The Housing Market Crash of 2007
The United States is being faced with one of the worst economic periods of it’s history. Many economists agree that the state of the US economy is the worst that that it has ever been next to the Great Depression of the 1930′s. Many factors led up the current recession but none more potently ignited the current crisis as did the Sub-prime Mortgage crisis that began in 2007.
Sub-prime Mortgages are loans given by banks and other financial institutions to borrowers with riskier credit scores and credit histories than the norm. Because these loans are riskier for the banks the yields or returns on loans to the banks are greater. John Lonski the chief economist for Moody’s investment services said that 21% of all US mortgages where sub-prime in 2006, that number up from 9% eight years earlier in 1994.
Since the banks were giving loans more and more heavily in the sub-prime market leading up to 2006, their risk increased. And soon, when many borrowers became unable to pay their mortgages the bubble began to burst and the domino effect that crashed the housing market, destroyed some of the greatest financial institutions of all time, and sparked the global recession of which we are still feeling the effects today.
Economic Crisis
Once the snowball started rolling, catastrophic occurrences became evident. The default rates and foreclosure filings started piling up in late 2006 into 2007. Sub-Prime Mortgagees could not make their monthly mortgage payments which in turn meant that banks stopped making money. Hundreds of banks worldwide closed their doors in the months and years to follow. When Bear Sterns and Lehman Brothers, two of the largest US financial institutions on record, closed their doors panic was felt throughout the world. The New York Stock Exchange (NYSE) crashed in September 2008. Investors throughout the world started pulling their money out of US banks and selling their US stocks and assets. The dollar shrank in value and many though the end of the world was near.
Foreclosure Domino Effect
Another factor which is credited in aiding the housing market crash and most recent economic downturn is the housing market bubble itself. Since the early part of the millennium banks started lending more liberally in both the prime and sub-prime markets. With this large influx of cash home buyers and investors took to the market and began
buying real estate properties in mass. The flood of money and buyers imploded the prices in the housing market to levels that were unaffordable. As soon as the borrowers were unable to pay their mortgage banks began the foreclosure process to regain possession of the asset. Since banks are obviously not in the property management or real estate business so to speak, the more foreclosures that they took back, the worse it became for everybody. Banks were stuck with homes and need to sell them so that they can cut their losses and not be out totally hundreds of thousands of dollars or whatever the previous selling price was. Therefore they needed to drop the prices drastically so that they can move the built up inventory of foreclosed properties of the shelves. Since the foreclosure inventory piled up, and the list prices were sometimes up to 80% off of the previous sale prices the overall average estimated house values tumbled nation wide. For the average American their home is their biggest investment so when values dropped so did consumer confidence and consumer spending. The retail markets where hit hard and the ripples made their way into the job markets, and unemployment rates skyrocketed nation wide. No jobs and no money became the second wave of foreclosures that plagued main street America and the cycle had made its way full course.