ResearchPaperPhase2 - The Crisis of the Housing Market and...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
The Crisis of the Housing Market and an Analysis of Irrational Behavior Surrounding the Housing Market Rachel R. Semeyn ISS 305 April 4 th , 2016
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The Crisis of the Housing Market Rachel Semeyn ISS 305 Research Paper: Phase 1 The Crisis of the Housing Market From 1995 to 1999, the housing market experienced steady growth. After the stock market crashed in 2000, there was a shift to the housing market. Now, instead of people spending their money on stocks, they invested in the housing market. In the wake of the recession, there was also plenty of cheap money available for new loans; meaning the loans had a low interest rate. People started buying up houses like crazy: for flipping, for homes, for renovation. This drove the prices of houses up and up and up. As a result, starting in 2007, and continuing through 2009, there were widespread foreclosures and a collapse of home prices in many parts of the United States. This housing bubble led to a financial crisis and a recession. Since this collapse, the United States has tried to design a succession of interventions to stabilize the housing market. The big question is: What caused this crash in the housing market in the first place? First, the indicators of the housing market need to be established. The main indicators of the housing market in the United States include: mortgage interest rates, low short-term interest rates, standards for mortgage loans, irrational exuberance, construction, and home sales (Holt 2009). The factors that seem to have the most impact seem to be mortgage rates and loans, and home prices and sales. In your life, you have most likely heard somebody talking about their mortgage rates, or their mortgage payments. Mortgages are a huge part of the housing market. The Federal Reserve attempted to strengthen the market from 2002 to 2004 by lowering the federal funds rate to historically low levels. They lowered the federal funds rate to 1.25 percent in November of 2002 2
Image of page 2
The Crisis of the Housing Market and to 1.00 percent in June of 2003 (Holt 2009). These rates contributed to the housing bubble because low short-term interest rates encouraged the use of adjustable rate mortgages, also known as ARMs. With the prices of homes on the rise, many buyers could not afford house payments under fixed rate mortgages. That is where these ARMs came in handy; they could provide home buyers with an initially lower monthly payment (Holt 2009). These ARMs made monthly mortgage payments and short-term interest rates a little more affordable for home buyers (Zywicki, & Okloski 2009). Unfortunately, this affordability made the price of houses rise even more. Fortunately, as housing prices were rising, they were a little offset by the record-low interest rates (Zywicki & Okloski 2009). As the housing prices continued to rise, everyone believed that they would simply continue to rise. The prices of homes had not dropped since the Great Depression, which made people believe that they would not be dropping. The price of homes is easily tracked using the House Price Index, or HPI (Baker 2007). This system tracks the prices of houses being sold and
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern