Real Estate Recession: Causes and Consequences

In December 2007, a massive real estate recession began that affected millions of Americans. The consensus is that this recession was caused by the so-called housing bubble that had formed in the previous years. The contributing factors included low mortgage interest rates and short-term interest rates, as well as the simple human greed (Holt, 2009; Samuelson, 2015). As a result, the United States faced the major 2008-2009 financial crisis that affected all economic and business spheres. In this persuasive essay, I argue that the housing bubble is to blame for the subsequent Great Recession, the consequences of which are still visible in the country’s economic development.

The problems in the real estate market could have been detected long before, but they were masked by the rapidly increasing prices (Holt, 2009). For several consecutive years, the number of families able to take out mortgages was rising steadily. Lenders, in turn, carelessly engaged in a practice called ‘subprime lending.’ In other words, they lent to families not really qualifying for a mortgage to buy a home, that is, unable to pay their bills regularly (Keating, 2008). Low-interest rates attracted middle-class Americans as well, who were unwilling to consider all risks associated with such surprisingly beneficial offers. The problem was aggravated by the fact that banks did not explain the risks and told their borrowers that they would be able to easily refinance their mortgages in only several years. As noted by Keating (2008), nobody wanted to believe that this real estate paradise will soon end, and the government did not intervene to prevent the disaster.

In 2005-2006, it became clear that many families would no longer afford to pay for their houses. Interest rates on the subprime mortgages increased, making it practically impossible for many families to pay their mortgages. Interestingly, Keating (2008) highlighted that not only poor households were affected by the bubble, but also well-to-do families who were eager to buy ever-bigger homes they could not afford. Samuelson (2015) agreed with this argument and noted that many Americans were driven by the greed and carelessness, which ultimately contributed to the world economic crisis. However, it would be wrong to blame regular Americans only, as the banks were also responsible for the massive real estate bubble (Keating, 2008). Their greed and dishonesty had resulted in a situation when investors and banks around the world became involved in the complex and sometimes illegal financial schemes.

It is not surprising that after the housing bubble burst, banks were no longer willing to lend, and this situation resulted in a “credit crunch” (Keating, 2008). This phenomenon is characterized by the limited liquidity of the banking system because there was simply no money to sustain its normal functioning. By 2008, it became clear that banks and financial institutions around the world lost billions of dollars because of the indiscreet lending policies. The purchasing patterns of regular Americans have changed, which hit the country’s economy, while many financial institutions had to declare bankruptcy (Keating, 2008).

In this way, one may summarize that the real estate recession of the late 2000s was caused by the ill-considered lending policies and banks’ dishonest practices that created an atmosphere of irrational and unjustified exuberance. Naturally, regular people are also partially to blame for the subsequent crisis because they took mortgages they could not afford. Although the USA slowly recovers from the Great Recession caused by the housing bubble, it is clear that governmental interventions and stricter policies are needed to prevent similar crises in future.

 

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References

Holt, J. (2009). A summary of the primary causes of the housing bubble and the resulting credit crisis: A non-technical paper. The Journal of Business Inquiry, 8(1), 120-129.

Keating, D. (2008). The 2008 economic crisis explained. Cafebabel. Retrieved from http://www.cafebabel.co.uk/politics/article/the-2008-economic-crisis-explained.html

Samuelson, R. (2015). What caused the housing bubble? RealClear Politics. Retrieved from https://www.realclearpolitics.com/articles/2015/02/02/what_caused_the_housing_bubble_125463.html

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