Tuesday, February 3, 2009
Sub-Prime Mortgages; the cause of the Housing Bubble Burst
February 3, 2009
By Sarah E. Horner
It is clear that the United States economy is facing tough times. This economic recession can be traced back to a number of different events, however Manav Tanneeru in his article entitled, “How a ‘Perfect Storm’ led to the economic crisis,” argues that perhaps the most prominent reason for the economic decline is due to the housing bubble.
Tanneeru points out that during the mid 1990’s, real estate was a rather sturdy investment, however then, after 1999, housing prices raised by an astounding 6% and has been increasing steadily since then. In order to fight these rising rates and the recession that was starting to set in the early 2000’s, the Federal Reserve began to slash interest rates. This made it very easy to borrow money and very easy for people with bad credit or poor financial history to buy a home.
For a while, everything was fine, people were paying their mortgages so lenders looked the other way at these sub-prime mortgages. However, with the onset of the recession, people started to lose jobs, interest rates rose once again, and housing prices went up. This is when people began to default on their loans and the foreclosures began to flood in.
In December home sales did rise an impressive 6.3% perhaps marking a turnaround in the recent housing bubble burst, however there are still way too many people experiencing foreclosures and now bankruptcy, and the real answer to the housing bubble problem is no where in site.