The American Housing Bubble
Real estate is a big discussion issue in modern day economic arena. Many Americans prefer owning homes rather than renting them. This is because the portion of a static rate mortgage used to compensate down the principal builds the owner partial ownership over time. They consider it an investment that grows in value with time. However, owning a house is not a risk free investment. People believe that homes do not loose value unlike stocks. They therefore, over commit themselves while taking their mortgage loans with the high expectations they have that its value will go up, and they will successfully pay up the loan. The value of real estates has been in a downturn since 2007. According to (Hardaway, 2011) many home owners who borrowed money and they were unable to pay back claimed that their lenders were to blame. They also quoted deceptive trade practices such as predatory lending and confusing disclosures. It brought about many problems, but the main one was the housing bubble which brought the entire real estate market crumbling.
United States housing bubble
A bubble continues to inflate when more and more people continue to invest, risking more and more money. United States housing bubble affected the housing market in more than half of American states. Housing prices rose to a peak in early 2006 and began declining in 2007. They have been decreasing consistently since then until they reached new lows in 2012 (S & P indices, 2012). The house prices were rising at an exorbitant rate, and it was becoming unaffordable for average americans. Several factors all contributed to the growth of the housing buble, including regulative bodies and the government as well. The mortgage lenders issued loans to people who would have difficulty paying it back. Lax regulation allowed banks to extend their lending standards and use aggressive tactics to get borrowers into mortgages that were more expensive than explained.
Causes of the housing bubble
Deregulation brought about many risky products such as the adjustable rate mortgages and easy credit, which greatly contributed to the housing bubble. Adjustable means that the rate and payment of a loan can change. The frequency of change and the amount relies on the conditions of the loan.(Weston, 2008). Deregulation and insufficient regulation were the immediate solutions brought forward when the downturn began. Bailing out banks, failing companies and financial institutions were among the solutions proposed. Tax payer’s money was used to keep the financial institutions going after they faced massive loan defaults and by so doing, they only kept the housing bubble growing. This was in an effort to keep the prices high, and housing was way beyond what many average Americans could afford.
Criticism of mandated loans
According to Pinto (2009), these loans were given to borrowers with tarnished credit or involved small or no down payment. They also involved limited documentation of income. What followed were high rates of defaulting, which drove the housing prices down and weakened the financial system. This was all in a bid to encourage lower-income Americans to become homeowners. It gave a window for simple borrowers, unscrupulous lenders, and mortgage brokers to turn the dream of home ownership into a nightmare. They took advantage of this window without prior considerations of their financial capability, and the consequences were loan defaults and the lending firms facing closure. These high rates of default are the ones that brought the housing prices down, and therefore weakened the financial system
Low mortgage interest rates
In the wake of the dot-com bubble, the Federal Reserve lowered interest rates dramatically. This spurred easy credit for banks to make loans. These rates multiplied with time and another problem set in. The high rates lowered the demand and the monthly payments increased for adjustable rates mortgages. The foreclosures that resulted from this increased supply and housing prices dropped further. In the financial year 2010, the US government paid 441 Billion dollars in interest to the federal debt at an average interest of 2.3 percent (Handaway, 2011).
Failure of regulative bodies to intervene
The regulative bodies failed to crack down on risky lending practices on banks and other financial institutions. The Federal Reserve did not set discreet mortgage lending standards. They refused to tighten inspection of the subprime mortgage market, and therefore the banks took advantage of this. They did not evaluate their client’s ability to sustain the loan. It was not until when the bubble exploded that the customers realized that they owed the banks more than their house were worth. The regulative bodies would have protected the people had they played their role as stipulated.
Measures to avoid the real estates bubble
When the bubble burst, so many people went bankrupt especially the average people are the ones that suffered most. The real estates business is still reeling from the blow it faced and measures have to be put in place to rectify this situation and prevent it from forming again. A combination of measures has to be put in place to ensure that the market is properly regulated.
Controlling the real price for real estate
So many variables influence the price of real estate including geographical position, environment around the real estate, people’s income, economic development stage, monetary policy, tax policy and so on (Zhou, 2011). On the land policy of real estate, the government should pay more attention to the supply structure of land lending. High price lands are used to construct high grade housing and villas, and increase in high grade housing will increase the real estates prices as a whole. The government should concentrate more on the supply structure of land lending and improve the supply of economically affordable houses. The affordable housing and low rent houses would be in more demand than the expensive villas, which are built on the high price lands. The price of real estates will be therefore balanced, and a housing bubble will not be easy emerge.
Real estate tax policy
Real estate tax emphasizes turnover tax while neglecting value added taxation. Levying a property in retain link would contain the speculation (Zhou, 2011). If real estate was taken as an investment market, value added taxation would be taken without question. Since most house buyers buy houses for their own use, they would not be selling the house any time soon. Therefore, levying real estates transaction tax would not impair the real needs and could even reduce the possibility of making real estates bubbles. The property tax will effectively stabilize the real estates market, manage the housing pries and effectively control speculation. The regulative bodies should be alert and should use the minimum and maximum basic value as an early warning to measure real estate bubbles and take appropriate actions. The state macro-control should effectively monitor the lending rates and the housing prices.
Recommendation to potential borrowers
Sometimes real estate's agents may refer a client to lenders who don’t have the most excellent mortgage rates and programs. These agents may not even be up to date with the lenders offering best loans and they might just refer a client there, simply because they feel comfortable working with certain lenders. Some real estates sales firms may also have a mortgage corporation owned by the same company and so they strategize on how to retain all profits at the expense of unsuspecting clients (Eric Tyson, 2004). It is therefore, advisable to consult widely with friends and acquaintances who do not necessarily work in real estate related fields. They most likely give an honest opinion. The government advice agencies and stakeholders should work together under the following recommendations brought about by (Best, 2011):
- Government should examine whether SMI provision could be extended so that more people qualify for assistance
- Government should enthusiastically encourage potential borrowers to take up insurance which would cover up for them if they are unable to pay back the loan.
- Proper guidelines should be put in place such that they explain clearly to clients the separate regulatory structures and unsecured lending so they are able to make wise decisions
- Further investigation should be conducted how home owners could scale the amount of equity up or down depending on their situation
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