The the precedent dotcom bubble. The historically

The housing bubble of 2000s remains one of the greatest economic challenges ever faced by the US. The housing bubble defines an economic bubble in which there was a remarked increase in housing prices in the United States. The price escalation was fueled by increased demand and speculation. Increase in demand for houses against the limited supply in the housing market marked an onset of the housing bubble.

With such a situation, speculators got into the housing market with a view to making profits through buying and selling of houses in the short-term. The entry of such speculators increased the demand further. With time, the demand decreased while the supply increased. This led to a significant drop in housing prices leading to the bursting of the bubble. The bursting of the housing bubble led to serious economic repercussions on the economic front (Roberts, 57). The housing bubble can largely be attributed to financial activities and monetary policies.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

The housing prices in the United States escalated due to increased demand and reached an all time high in early 2006. From 2007, the prices started to decline tremendously. In particular, the Case Shriller Home Price Index, in 2008, recorded the biggest price drop in its history.

The bursting of the bubble had much effect on the home valuations, mortgage markets and real property markets. While a lot of factors contributed to the housing bubble, financial activities and monetary policies played crucial roles in causing the bubble (Trass, 42). Traditionally, the Glass-Steagall Act played an imperative role in regulation of the financial sector. This act strictly regulated the lending activities of the commercial banks. It limited the banks’ lending activities and interest loans. However, from 1980s, significant changes occurred in the banking sector that set the stage for housing bubble. The banks were deregulated through several Acts.

Most notable Acts are the Gramm-Leach-Bliley Act of 1999 and the Garn-ST. Germain Depository Institutions Act of 1982, which permitted banks to set any interest rate on their loans. These Acts also allowed for adjustable rate mortgages in the economy. In addition, these Acts allowed developers easy access to credit.

The availability of credit increased people’s demand for houses. Similarly, the power of the developers to erect more houses to meet the heightened demand increased. This contributed to the housing bubble crisis. The deregulation brought about by the financial Acts enabled the banks to present risky products to the people. By enabling the banks to adjust their lending rates and interest rates, it was easy for the house bubble to set in. the security markets were equally to blame for the housing bubble. The Federal Reserve rapidly lowered the loan interest rates in response to the precedent dotcom bubble. The historically low interest rates made credit access much easier than before.

The lowering of interest rates increased supply that served to cause a further drop in prices of houses in most states. The intense competition between the mortgage lenders pushed them to loosen their lending conditions. Subprime lending intensified due to the easy credit access conditions.

Prior to 2003, subprime mortgage lending remained below 10%. However, this doubled to 20% by 2006 during the peak of the bubble. This led to an increase in demand for houses causing an increase in prices of houses, hence the onset of the bubble. The effects of the United States housing bubble on various aspects of the economy cannot be understated. The sharp drop in housing prices increased the rate of loan defaulting significantly.

This was down to the increased subprime lending. The fall in housing prices made it difficult for subprime lenders to refinance their loans. Prior to the bubble, there was a massive inflow of foreign capital into the US economy from other world economies. This foreign money inflow plus the low interest conditions, increased credit availability and access in the United States.

The decline in housing prices plunged global financial institutions into crises as they witnessed heavy losses. This affected virtually all aspects of global trade for established economies (Trass, 71). The lending potential of financial institutions declined and the governments engaged in extra financial commitments in their bid to bail out the fundamental institutions.

This has limited the money available for investment in opportunities globally. In addition, the volume of global trade will decline tremendously since the industrialized countries will tend to reduce their demand for imports from other economies. The business cycle has not been spared either of the eminent effects of the housing bubble. The housing bubble led to a slowdown in the economy. With the United States constituting nearly one third of the world’s GDP, the world’s business cycle will undoubtedly be affected. The housing bubble has profoundly affected the country’s demand for exports from other countries thereby affecting the world business cycle (Cline, 112).

The economic slowdown due to the housing bubble, also impacts on the workers’ wages. Workers’ wages are much likely to stagnate for long periods especially during this recovery period. The housing bubble did not only affect the US economy but it had unpleasant effects on economies afar, as well.

The distant places such as California, Wall Street and Europe were all connected through the cash inflows. With the increasing prices, investors from varied ends were investing in the US housing markets from Europe and even the fast growing Asian economies.

Works Cited

Cline, William. Financial Globalization, Economic Growth, and the Crisis of 2007. New York: Peterson Institute, 2010. Print. Roberts, Lawrence. The Great Housing Bubble.

California: Monterey Cypress LLC, 2008. Print. Trass, Kieran. The Housing Bubble: The Real Estate Cycle- Why You Can Grow Rich in Slumps as Well as Booms.

Auckland: Penguin Group, 2009. Print.


I'm Mary!

Would you like to get a custom essay? How about receiving a customized one?

Check it out