Housing Prices Essay Example | Topics and Well Written Essays - 1500 words

Housing Prices - Essay Example In this paper, we will first have a look at the whole U.S. mortgage crisis scenario as that has been the major factor that has brought this whole situation into the public perception. Understanding the situation in the light of statistics is very important, as even though this whole topic is so dense and enormous that it cannot be in this paper, but it is certainly essential to have a feel of the situation before we move along. Then, we would move onto the U.S. housing market and try to understand the shifts in pricing over the past decade and the reasons behind these shifts. Furthermore, we will try and determine the implications of the housing market on the economy of the country in general i.e. what effect will the volatility have on the demand and supply equilibrium of the market itself and the greater effect this will have on the economy in general. This is an important section of this paper as this provides the rationale for conducting an analysis on the housing prices and also helps us understand key economic indicators which can help us understand the market better and perhaps prevent market meltdowns like the one suffered in 2006 from occurring again. Finally, we will conclude the paper with our final remarks on the conducted analysis. [1] The U.S. mortgage side has been ruined. ... Even those from lower classes "benefited" from this housing price bubble by being able to own houses with small down payments. Rising prices of housing led to increased borrowing on home equity. The Americans were enjoying their time in the U.S as housing prices shot up 40% between 2000 and 2006 to a high of $234,000. The ratio of median house price to median household income rose from a historically steady ratio of three times (from 1970- 2000) to five times in 2006. This could not be sustained. Housing prices tapered off and started to decline in early 2006 and furthermore in 2007 and 2008; in compliance with what we have seen in the recent two years. With a $20 trillion housing sector, every 10% fall erodes off $2 trillion in household wealth. Almost in parallel, rates of default and foreclosure began to climb. In 2006, 1.2 million household lends saw foreclosure, up 42% from the previous year. The basic definition of sub-prime mortgages is basically lending to borrowers who want to buy a house but who have a weak credit rating. Lenders did so by providing small or zero down payment, and low introductory adjustable rate mortgages. Between 2004 and 2006, there were bookings of $1.5 trillion (15% of the total U.S. housing lends) of sub-prime mortgages. Total sub-prime lends form 25% of the housing mortgage market; these sub-prime lends were fine as long as the housing market continued to boom and interest rates remained stable. When these conditions disappeared, sub-prime borrowers defaulted. The defaults caused an implosion of Mortgage-backed securities and the Collateralized debt duties industry. The blow out shelled in June 2007 with the collapse of sub-prime mortgage hedge funds managed by Bear Stearns, quickly followed by suspending other funds managed