What Happened When the Housing Bubble Burst?
Since 2008, home prices have been steadily increasing. Some argue that this results from cheap mortgage debt spurring buyers to buy. But, in reality, there is a lack of supply, and home sellers have responded by raising prices. The result has been intense buyer competition, bidding wars, and crushing affordability for first-time buyers. If the housing market suddenly shifts away from affordable housing, the result could be a chaotic downturn.
Home prices have been rising steadily since 2008
In the immediate post-bubble period, the median housing prices fell for two years straight. These were the years 2008 and 2009. The immediate post-bubble era was characterized by a slowdown in home prices due to interest rate changes. The ensuing recession caused unemployment to soar to 10% and GDP to fall by 5%. But home prices have since risen steadily.
The mid-2000s housing boom was fuelled by dubious lending and market euphoria. The current housing boom has its own set of reasons. One of them is a lack of supply across the United States. There is a three-month supply of homes for sale nationwide. As a result, sellers can command higher prices for their properties. This was a drastic change from the previous housing boom when there were 12 months of supply.
The average sales price of a house in the United States is now $310,600, a record-high. The housing bubble was a result of monetary policy during the Bush years. But a shortage of homes helped keep the market strong. In addition, the COVID-19 pandemic increased remote work opportunities, and more people moved away from their homes to find work.
Whether or not the current real house price surge is a sign of a bubble is unclear. While rapid house-price appreciation does not signal a drop, it does show that the market is out of whack with fundamentals. Some economic indicators, such as price-to-rent and income-to-rent ratios, suggest that prices are out of whack with the fundamentals.
Lehman Brothers collapse
When the housing bubble burst in 2008, the value of mortgage-backed securities began to fall. Meanwhile, bank reserves began to grow as delinquencies and foreclosures increased. At the same time, no one knew how much toxic debt was buried on bank balance sheets. The lack of liquidity caused several banks to fail, and the collapse of Lehman Brothers and Bear Stearns resulted from the inability to obtain a daily loan.
In the wake of the crash, Lehman Brothers announced it would have to give up a majority stake in the company to restructure its loans. The company’s leverage was thirty to one and 15 to one. While the stock price of Lehman Brothers plummeted by 40% that day, it was still holding about $1 billion in cash at the end of the week. Banks like Barclays and Bank of America tried to buy Lehman but ultimately failed. Lehman Brothers declared bankruptcy on Sept. 15, 2008, after which it owed billions to investors.
During this time, the financial sector has shifted from high-risk activities to less risky ones. Its recent move away from these investments is encouraging because it shows that banks are improving at managing risks. But it is worth noting that despite this positive trend, the housing market remains overpriced. Recent votes to reduce Dodd-Frank Act regulatory processes may cause another financial crisis.
After the 2008 housing bubble burst, the financial markets beat severely. Lehman Brothers became the fourth largest investment bank in the U.S. and had 25,000 employees worldwide. The collapse of Lehman Brothers shook the world and caused a deep recession in many countries. Several factors contributed to the firm’s demise, including lacking trust in the financial markets, over-leveraging, and poor long-term investments.
Subprime mortgages led to the housing bubble.
In the early 2000s, the financial industry began to bundle high-risk mortgages into complex investment products and sell them to investors. Most of these subprime mortgages ended up in default, and one in five were seriously delinquent by July 2008. By July 2008, financial institutions held trillions of dollars in near-worthless mortgage securities. The financial sector is still reeling from the effects of the housing bubble.
The housing bubble occurred because lenders made and sold large subprime mortgages. These loans were risky and difficult to pay back, and interest rates on them were rising at a rapid pace. Lenders were eager to give these loans to borrowers, despite the risk. During this period, they also assumed that home prices would continue to rise, and interest rates would stay low. Investment banks also got reckless and invested more in mortgage-backed securities (MBS).
In the mid-2006 period, lenders rushed to issue subprime mortgages, hoping that the high prices would cause a glut of unsold homes. This resulted in a peak in U.S. housing prices, which started to decline in mid-2006. Subprime borrowers could protect themselves from high mortgage payments by refinancing their mortgages, taking out second loans, or borrowing against the increased value of their homes.
This crisis can be attributed to several factors, but the leading cause is a series of economic conditions. The first of these conditions was a lack of liquidity. In addition, the mortgage markets were over-leveraged, and lenders relaxed lending standards to provide loans to people who shouldn’t have been eligible. Some lenders even committed mortgage fraud or inflated borrowers’ income to qualify for a mortgage. Another factor contributing to the crisis was the role played by credit agencies, which gave high-quality AAA ratings to risky CDOs and MBS.
Drug war increased public support for the drug war.
In 2014, the United Nations Office on Drugs and Crime (UNODC) published the World Report on drugs. This report identifies the drug war as a significant contributor to the housing market crash. It notes that marijuana and other illicit drugs are the leading causes of the housing bubble. Despite its negative impact on the economy, the drug war continues to increase public support for government policies and strategies, despite growing general dissatisfaction.
The drug war is a significant source of federal funding, with billions of dollars going to interdiction. It is the world’s most effective criminal justice system, with more than half of federal inmates being held for drug crimes. Yet even as prison and jail populations have dropped by a quarter since 2009, the housing bubble has continued to grow and increased public support for the war. The drug war also has become an effective way to combat the growing number of immigrants in the United States, which is why it’s important to recognize drug policy’s role in the housing crisis.
The drug war has doubled down on its purpose. It makes profits for the narco-capitalists and the drug war military-industrial complex. It also polices political dissent and confers benefits to the Mexican government. In addition, the drug war has scapegoated Mexicans and African Americans. It has stoked the fears of the public and led to increased support for government policies.