Setting: a
panoramic birds-eye-view of suburbia with then sun shining and birds singing;
moving from left to right, the even cut grass, identical roofs, and perfect
little picket fenced-in yards. It’s the perfect scenery for the beauty of life
to be created and raised, little families blossoming in their all-too-close
together homes. It’s 2008 and the inevitable is upon every single one of these
homeowners. Thrust into an economic downward spiral initiated in the 1990s, the
massive bubble of perfection was about to fulminate. The housing market crash of 2008 was an inescapable consequence due to
the faulty economic choices made by both the nation and world in the years
leading up.
In
the 1990s, China began to be a world leader economically. It set into motion an
economy based on exports, which set it up to become the second-largest economy
in the world (Jenkins). The savings rate of the developing world soared and
went far beyond its investment rate. This, in turn, created an inevitable fall
in the long-term interest rates; additionally, it would cause increasing asset
prices, especially house prices: the housing market bubble.
A housing bubble
is a run-up on housing prices that are fueled by a dramatic increase in demand,
speculation, and the belief that recent history is an infallible forecast of
the future (Housing Bubble). Such housing bubbles are predictably started by a
shift right on the demand curve as a result of a limited supply, which takes a
relatively long period of time to replenish and increase. The biggest issue
with this is that individuals whom enter the market believe that profit can be
made from short-term buying and selling; however, this drives demand. When the
demand drops, a shift left in the demand curve, and increases simultaneously,
resulting in a sharp drop in prices and thusly the bubble bursts. This
traditionally happens in other markets; in fact the housing market is not as
prone due to the large transaction and carrying costs that are associated with
house ownership (Housing Bubble). So what really caused the “inevitable” crash?
One has to backtrack from the 1990s to 2008 in order to understand what
happened.
Following
the events of September 11, 2001 and the dot-com crash, the United States was
left in economic pain. The solution came from dipping into the Federal Reserve
in order to cut interest rates to record lows (Jenkins). Real estate markets
reaped the benefits and drove the financial vehicle of the country, eventually
right off a cliff.
There
was too much homeownership. From 1994 to 2004 there was a homeownership
increase of 5.2%; this meant that a record 69.2% of people owned a home (Merriam).
This caused people to buy for speculation instead of for shelter. It was
identified that 23% of homebuyers had identified their purchases as
investments: house flippers. Real estate flippers are battling a whole minefield of
problems in order to make some big cash. Problems with borrowing, insurance,
renovations, inspections, market conditions and more can make a huge dent in
the tens of thousands of dollars they could make on one flip (Flippers).
Low
interest rates made money cheap and cheap money had caused rates to drop to 1%
from the 6.5% in order to overcome recession from 2000-2001. Consequently, the
dot.com bubble burst brought in an influx of money for residential real estate
(Merriam). People invested with the assumption that it was safe.
Bank-pressure resulted in
simply bad lending practices from reduced jobs and income led to countless
defaulted loans. The situation became that people jumped at the idea of
achieving the “American Dream” when it seemed plausible. Legislation and
changes to the Community Reinvestment Act of 1977 encouraged commercial banks
to lend to low-income households (Jenkins). This pushed for greater
homeownership; it was not directly meant to create such loans for securitized
investments. However, it did encourage under-writing standards to decrease.
Economically,
the perfect storm was created: the combination of September 11, 2001, the burst
of the dot-com bubble, Federal Reserve spelunking and plummeting insurance
rates. Loans were pooled together to keep such momentum going and caused
alternative mortgage products or AMPs (Jenkins). AMPs were bad and toxic
assets; they created a circumstance in which the borrower maintained very
little in property equity. In addition, borrowers were able to defer on
repayment for several years and caused increases to be faced that resulted in
payment shock. In the end, the system broke and the bubble burst.
In the 2009 Congressional testimony by
Federal Reserve Chairman Alan Greenspan, it was the “global proliferation of
securitized US subprime mortgages” that triggered the crisis (Jenkins). However
Randal O'Toole (an Oregon native, educated in forestry at Oregon State
University and in economics at the University of Oregon) has a different
opinion. He believes that local factors, not national policies, were a
necessary condition for the housing bubbles where they took place (O'Toole). O’Toole
backed his beliefs by referencing how the burst effected certain areas much
more drastically than others. In 2006, research was done to model what would
happen if a real-estate crash were to happen. They concluded that one cannot be
sure of the scale of shock simulated could be sufficient to put the United
States into any sort of recession. However, it was acknowledged that the burst
could have serious and adverse consequences despite unknown exact size and
speed (McKibbin).
Yet if one walks
around their suburban fence-lined neighborhoods, it is very easy to run into a
stopped project. The burst caused a “cease-fire” in many real estate building
plans, with some neighborhoods adjoining a cluster of five houses where
twenty-five had been planned. From the research gathered above it is clear that
the relevant truth is that a trickle-down effect of poor economic choices
caused our nation to be faced with a harsh reality, with no one to blame but
ourselves.
