How the Bursting of the U.S. Housing Bubble Triggered the Financial Meltdown
The banking and financial market meltdown of 2007-2009 resulted in the downfall of large financial institutions, bailouts for banks by national governments, and global declines in stock markets. A suffering housing market also contributed to the economic recession. While there were many factors that triggered the global market meltdown, this paper will focus on the factors that created the U.S. housing bubble and how the bursting of the U.S. housing bubble sparked the recession.
Home ownership is part of the “American Dream,” but because homes can be expensive, most people need to borrow money to buy them. In the early 2000s, mortgage rates were low, which allowed people to borrow more money with lower monthly payments. According to Katalina M. Bianco, author of “The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown” the U.S. ownership rate increased from 64% in 1994 to 69.2% in 2004; this demand helped fuel the rise of housing prices (Bianco, 2008). Because home prices were increasing, many homeowners decided to refinance and take second mortgages to cash out of their homes’ equity. According to Merrill Goozner of The Fiscal Times, a simple explanation for what caused the Great Recession is people had too much debt; during the housing bubble, too many homeowners used their inflated home equity like “piggybanks” to support their spending (Goozner, 2012).
Banks also contributed to the creation of the U.S housing bubble by offering easy access to money. Many borrowers got into high risk mortgages and numerous people with bad credit could qualify as subprime borrowers. According to Bianco, subprime borrowing was a key factor in the increase in home ownership rates during the housing bubble (Bianco, 2008).
Some experts suggest mortgage standards relaxed during this period because each link in the “mortgage chain” believed it was passing on the risk to someone else (Bianco, 2008). Most banks do not keep mortgages on their books; instead, they
Home ownership is part of the “American Dream,” but because homes can be expensive, most people need to borrow money to buy them. In the early 2000s, mortgage rates were low, which allowed people to borrow more money with lower monthly payments. According to Katalina M. Bianco, author of “The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown” the U.S. ownership rate increased from 64% in 1994 to 69.2% in 2004; this demand helped fuel the rise of housing prices (Bianco, 2008). Because home prices were increasing, many homeowners decided to refinance and take second mortgages to cash out of their homes’ equity. According to Merrill Goozner of The Fiscal Times, a simple explanation for what caused the Great Recession is people had too much debt; during the housing bubble, too many homeowners used their inflated home equity like “piggybanks” to support their spending (Goozner, 2012).
Banks also contributed to the creation of the U.S housing bubble by offering easy access to money. Many borrowers got into high risk mortgages and numerous people with bad credit could qualify as subprime borrowers. According to Bianco, subprime borrowing was a key factor in the increase in home ownership rates during the housing bubble (Bianco, 2008).
Some experts suggest mortgage standards relaxed during this period because each link in the “mortgage chain” believed it was passing on the risk to someone else (Bianco, 2008). Most banks do not keep mortgages on their books; instead, they
Cited: Bianco, K. M. (2008, April 8). business.cch.com. Retrieved from http://business.cch.com/bankingfinance/focus/news/Subprime_WP_rev.pdf Goozner, M. (2012, March 16). Real recovery: America’s debt is on the decline. The Fiscal Times. Retrieved from http://www.thefiscaltimes.com/Articles/2012/03/16/Real-Recovery-Americas-Debt-is-on-the-Decline.aspx