| United States Housing Bubble |
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The United States housing bubble is the is a type of Economic Bubble that occurs periodically in local or global Real Estate markets. The housing bubble in the U.S. was caused by historically low interest rates, poor lending standards, and a mania for purchasing houses. This bubble is related to the Stock Market or Dot-com Bubble of the 1990s. A Housing Bubble is characterized by rapid increases in the Valuations of Real Property such as Housing until unsustainable levels are reached relative to incomes, Price-to-rent Ratios , and other economic indicators of affordability. This in turn is followed by decreases in home prices that can result in many owners holding Negative Equity , a Mortgage debt higher than the value of the property. Bubbles may be definitively identified only in hindsight, after a market correction,A prediction of a correction in the housing market, possibly after the ". 2 which began for the U.S. Housing Market in 2005 – 2006 . In the wake of the Subprime Mortgage Crisis in 2007 , which was caused by a large number of home owners unable to pay the mortgage as their home values declined, Freddie Mac CEO Richard Syron concluded, "We had a bubble,"3 and concurred with Yale economist Robert Shiller 's warning that home prices appear overvalued and that the correction could last years with trillions of dollars of home value being lost. Problems for home owners with good credit surfaced in mid- 2007 , causing the U.S.'s largest mortgage lender Countrywide Financial to warn that a recovery in the housing sector is not expected to occur at least until 2009 because home prices are falling “almost like never before, with the exception of the Great Depression .”4 The impact of booming home valuations on the U.S. Economy since the 2001–2002 Recession was an important factor in the recovery because a large component of consumer spending came from the related refinancing boom, which simultaneously allowed people to reduce their monthly mortgage payments with lower interest rates and withdraw equity from their homes as values increased."The crux of the debate is house prices. If the inflated prices are justified by economic fundamentals and sustainable, then the 82 percent increase in mortgage debt since 2000 will probably turn out to be innocuous and the risks to the economy minimal. If, on the other hand, prices are out of whack, painful adjustments lie ahead. Unfortunately, the weight of the evidence strongly suggests a bubble. The price of the Median home is up an inflation-adjusted 50 percent during the last five years, an unprecedented national increase. … Just as cheerleaders of the high-tech bubble of the late 1990s developed ever more creative explanations for why traditional metrics of valuing stocks no longer applied, the same has been true during the housing bubble. Housing bulls point to immigration, building restrictions, Baby Boomer demand for second homes, and other seemingly plausible justifications for skyrocketing home prices. But examining the value of housing using time-tested and common-sense metrics such as price-to-income and price-to-rent ratios suggest the gains in the bubble areas can't be explained by economic fundamentals. … People are buying in the face of sky-high prices because they've seen so many of their friends or relatives make a fortune in real estate; besides (they tell themselves), everyone knows real estate prices never fall. As with the stock market during the tech bubble, many are basing purchasing decisions not on underlying economic value, but on what they think they can sell a property for in the future—the very definition of a speculative bubble. … Even flat home prices would therefore slow economic growth unless other parts of the economy rapidly accelerate. But a hard landing—meaning a recession—is a real risk. If home prices fall modestly, millions of homeowners will see their equity wiped out. Many of those with the least amount of equity, as we've already shown, are going to face significant increases in their monthly payments. So what has been a virtuous but unsustainable cycle for the economy—higher home prices, more borrowing against home equity, higher spending, increased job creation, even higher home prices—could easily reverse and become a vicious cycle—higher monthly payments, declining home prices, less spending, job losses, foreclosures, even lower home prices." 5 The collapse of the U.S. Housing Bubble has a direct impact not only on home valuations, but the nation's mortgage markets, home builders, home supply retail outlets, Wall Street Hedge Funds held by large institutional investors, and Foreign Bank s, increasing the risk of a nationwide recession. Concerns about the impact of the collapsing housing and credit markets on the larger U.S. economy caused President Bush and Fed Chairman Ben Bernanke to announce a limited bailout of the U.S. housing market for homeowners unable to pay their mortgage debts.6 TIMELINE 's plot of U.S. home prices, population, building costs, and bond yields, from '' Irrational Exuberance '', 2d ed. Shiller shows that inflation-adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004, whereas U.S. census data from 1940–2004 shows that the self-assessed value increased 2% per year.]]
(fixed-rate loans). For interest-only mortgages, the change in principal yielding the same monthly payment is :: (interest-only loans). This calculation shows that a 1 percentage point change in interest rates would theoretically affect home prices by about 10% (given 2005 rates) on fixed-rate mortgages, and about 16% for interest-only mortgages. Robert Shiller does compare interest rates and overall U.S. home prices over the period 1890–2004 and concludes that interest rates do not explain historic trends for the country.
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