Housing Bubble
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- Date Submitted: 08/15/2012 06:56 AM
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Housing Bubble
In the late 90’s and the early part of the new century the housing market started to boom. During this time people were buying homes, not knowing what they were getting themselves into. With all this happening the government called this the” Housing Bubble”. Mortgage and lending company was qualifying people for home at a rate never seen before. People were qualifying for loans that previously weren’t eligible for. Now we see homes in foreclosure. Economists including the Federal Reserve board ignored a growing housing bubble that existed during this time. Everyone come up with the same question. How could this happen?
Bubbles are created when too many resources are flowing to an area of the economy that is unwarranted due to misleading information. The market relies on information. The more information and the more reliable the information the better it is. In the case of our modern boom and bust cycle, the Federal Reserve creates them by manipulating what should otherwise be a free market determined price, which is the “risk free interest rate”. This manipulation of interest rates can send the wrong signals to the market and therefore, the wrong information. Again, interest rates are simply the price of money.
They began to lower interest rates in an effort to increase the flow of capital. As money fled the stock market, it began to spread into other sectors of the economy. Real estate became the natural choice, because of historically cheap money (low interest rates) and government intervention that artificially increased the demand for housing. This diversion of capital resulted in a massive over production in housing.
There were many factors lending to the housing bubble. Two of the major player’s to this problem where Fannie Mae and Freddie Mac, who was responsible for the majority of the loans issued at the time. In fact, there were a number of factors leading to the housing bubble, and those listed above are just two. You could add...
In the late 90’s and the early part of the new century the housing market started to boom. During this time people were buying homes, not knowing what they were getting themselves into. With all this happening the government called this the” Housing Bubble”. Mortgage and lending company was qualifying people for home at a rate never seen before. People were qualifying for loans that previously weren’t eligible for. Now we see homes in foreclosure. Economists including the Federal Reserve board ignored a growing housing bubble that existed during this time. Everyone come up with the same question. How could this happen?
Bubbles are created when too many resources are flowing to an area of the economy that is unwarranted due to misleading information. The market relies on information. The more information and the more reliable the information the better it is. In the case of our modern boom and bust cycle, the Federal Reserve creates them by manipulating what should otherwise be a free market determined price, which is the “risk free interest rate”. This manipulation of interest rates can send the wrong signals to the market and therefore, the wrong information. Again, interest rates are simply the price of money.
They began to lower interest rates in an effort to increase the flow of capital. As money fled the stock market, it began to spread into other sectors of the economy. Real estate became the natural choice, because of historically cheap money (low interest rates) and government intervention that artificially increased the demand for housing. This diversion of capital resulted in a massive over production in housing.
There were many factors lending to the housing bubble. Two of the major player’s to this problem where Fannie Mae and Freddie Mac, who was responsible for the majority of the loans issued at the time. In fact, there were a number of factors leading to the housing bubble, and those listed above are just two. You could add...