Subprime Mortgage Crisis and Houses Essay example

Submitted By fxtx1989
Words: 1464
Pages: 6
Open Document
Surname
Instructor
Course
Date
Financial Crisis In Relation To Subprime Mortgages
Introduction
Carmen and Rogoff stated that financial crisis is not a new thing in a country like USA, but sometimes it comes as a surprise. This statement reflects the situation experienced in the country during the 2008 financial crisis (Allen 3). The 2008 financial crisis is believed to be as a result of the subprime mortgage crisis in the USA. The crisis came at a time when the country was facing an economic boom. Between the year 1997 and 2006, the prices of houses had risen up to 188% in the country. However, by the year 2009, the prices had gone to 33%. As a result of this decrease, the country enjoyed low prices in the housing sector but this brought about a sequence of other problem in the country’s financial system. The country experienced a period of mortgage felony, devaluations in securities, decline in house investments, foreclosures, and other financial investments problems. All these outcomes form the US subprime mortgage crisis of 2008.
This paper is an analysis of 2008 financial crisis and its relation to subprime mortgage crisis in the same year. In this paper, a look at the causes of the financial crisis are analysed to try and develop an argument that it was really the subprime mortgage crisis that fueled the financial crisis.
From 2007, the US economy started facing difficuties where investors were losing money day by day and others going bankrupt. Joseph Cassano, an executive at belmoth AIG at the time of the crisis, predicted a loss of one dollar in every transaction the company did .In the same year, investors like AIG experienced a continued devaluation of their invested assets (Helleiner 3). The crisis extended to all sectors of the economy leading to deteriorationof financial markets, fuelling inflation, and high losses in wealth. Individual were highly affected and the only thing they could rely on were the assets they had kept such as equity loans from houses and retirement funds (Treasury.gov)
Within a period of one year, the crisis had spread from a financial sector problem to an economy-wide recession. There was continued reduction in investment, workers retrenchments, and reduction in household spending. This led to high unemployment rates, low production, and less earnings each year. The continuity of this problem affected foreign banks and thecountry’s export and imports. The government was then faced with criticism from all sides.
The Housing Bubble
To determine the root cause of this financial crisis, we look at the situation a few years back before this crisis happened. According to Shiller ( 38), due to control of inflation, the price of houses was stable from 1890 until 1970. The changes in the prices then started being seen from late 1990’s and early 2000.. The increase stated with a genuine increase in demand, with people purchasing financial assets each and every day hoping that they will benefit from the expected changes in prices of assets that were occurring by then. The prices of houses went up with those who were selling and buying expecting further changes and bigger profits from the real estate industry.
With assumptions that the prices would continue rising, buyers were willing to pay more for the houses hoping that there would be better returns from their investments. With this in mind, real estate agents also increased their rates with speculations that the prices of houses would continue going up. There was some assurance of extensive profits in the housing business and for this reason, individuals and families were convinced to buy houses at high rates. This registered a 1.5% increase in the value of houses form 1998-2003. There was also an increased supply of rental spaces and construction rate of 9.0% (Baker 2). Economic analysts came up with several ideas to explain this issue. For instance, John Maynard Keynes, who is known to be the founder of modern macroeconomic, in the
Show More

Related Documents: Subprime Mortgage Crisis and Houses Essay example

Essay on Student: Subprime Mortgage Crisis and Euro Zone Members

Acevedo Iris Neto Isis Neto Bruno Ustariz The Subprime Mortgage In late 2007, every single person in United State had felt the mortgage crisis as it was visible to even children in high school; the crisis didn’t only affect the United States, it created a panic in the financial market around the world. This is the consequences of giving too much of loan to borrower and damage the financial forming of the country. Having a beautiful house in Miami, is a part from your “America Dream”. However…

Words 3336 - Pages 14

2008 Financial Crisis Research Paper

Housing and Mortgage Markets Financial Crisis, 2008-2009 For generations, the American dream for many people has been to have their own house. Homeownership has been an important symbol of wealth for American through all history. The mortgage market had given the opportunity to many families to fulfill their dreams, which then became a nightmare.“Indeed, the homeownership rate reached a record high of 69.2 percent in the second quarter of 2004.”(Barth, Li, Lu, Phumiwasana, and Yago).Individuals considered…

Words 1146 - Pages 5

What Is The Main Cause Of The 2008 Financial Crisis

There is no way anyone could be unaware of the financial crisis of 2008, which began in the U.S. It was described as one of the most intense crises, if not the biggest, that has ever happened in the history of economics. ‘The main cause of this recession was the toxic assets, which are defined as investments backed by risky subprime mortgages’ (About money, 2015). In this short essay, I am going to examine the possible perspective of Hyman Minsky, an important political economist who grew up during…

Words 686 - Pages 3

The Impact Of The Subprime Crisis

shows that the estimated losses on U.S subprime loans and securities, estimated as of October 2007, was about $250 billion dollars. * The expected cumulative loos in world output associated with the crises to be forecast around $4,700 billion so about 20 times the initial subprime loss * And the decrease in the value of stock market capitalization from July 2007 to Novemeber 2008 was equal to $26,400 billion, so about 100 TIMES the initial subprime loss. Hence the question is how could…

Words 1740 - Pages 7

ECO PAPER

Special Topic 5- The Crisis of 2008: Causes and Lessons for the Future 1.) Why did housing prices rise rapidly during 2001-2005 and then fall in the years immediately following? Did regulation and monetary policy play a role in this housing boom and bust cycle? “During the years of 2001-2005 housing prices rose due to the fact that the mortgage default rate and the foreclosure rate was at an all time low” (pg.671). The government was making new standards for housing loans and mortgages, which made them…

Words 1176 - Pages 5

Obam The Culture Of Irresponsibility Lead To 2007 Financial Crisis

Obama: ‘the culture of irresponsibility’ caused 2007 financial crisis How did culture of irresponsibility lead to 2007 financial crisis? Introduction: America President Obama said that the culture of irresponsibility was the most important cause of 2007 financial crisis (CBSNEWS, 2009). He pointed out that it was a failure of the entire system, mainly the failure of government and the irresponsibility banks. He also said ‘millions of Americans who have worked hard and behaved responsibility…

Words 2134 - Pages 9

Management Essay 2

development of internationalisation, global finance and business have been interlinked so strong that the consequences of the financial crisis have been more and more serious and widely spreading. Thus international business is very often affected and attacked under financial crisis. Two financial crisis Charles Kindleberger (2011) argued that financial crisis occurs periodically and regularly in the business cycle. It is then documented by Reinhart and Rogoff (2009) as a system of regular boom…

Words 2001 - Pages 9

Essay about Applied Economic Theory

annual rate of nearly 9 percent from 2000 through 2005, house prices have decelerated, even falling in some markets. At the same time, interest rates on both fixed- and adjustable-rate mortgage loans moved upward, reaching multi-year highs in mid-2006. Some subprime borrowers with ARMs, who may have counted on refinancing before their payments rose, may not have had enough home equity to qualify for a new loan given the sluggishness in house prices. In addition, some owners with little equity may…

Words 1080 - Pages 5

Mortgage Crisis Essay examples

that I outlined the cause and effect of the mortgage crisis. I also speak on the falling housing prices due to the mortgage crisis and the domino effect that will be created on and for the economy. I will also speak on the foreclosure rates caused by sub-prime loans and no fall back plan to help in the case of the mortgagor defaults. The Mortgage Crisis Thesis Statement: The mortgage crisis that has caused house prices to fall and foreclosures to occur across…

Words 1824 - Pages 8

goverment crisis Essay

21October 2013 The U.S. subprime mortgage crisis was a set of events and conditions that led to a financial crisis and subsequent recession that began in 2008. It was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. These mortgage-backed securities and collateralized debt obligations initially offered attractive rates of return due to the higher interest rates on the mortgages; however, the lower credit…

Words 1073 - Pages 5