Most studies on the rise in home prices before the Great Recession have concentrated on factors that contributed to excessive demand, including permissive lending, foreign savings, loose monetary policy, supposition, financial deregulation, and federal housing vouchers. Fatalism regarding the decline in homebuilding that started in 2006 and the inevitable recession and economic collapse that followed was brought on by the emphasis on quantity demanded. Whatever the causes of excessive demand, it became widely accepted that demand needed to be lowered because American spending had reached unsustainable levels due to a housing bubble.
Like a sudden rise in the cost of any good or service, a housing bubble often starts with rising demand and a shortage of available stock. A significant housing bubble that affected the American economy in the middle of the 2000s contributed to the Great Recession. According to Fox journalist Dumas, the previous housing bubble emerged following a time when lenders were more relaxed about issuing loans, and more people were investing in homes rather than purchasing them for habitation (3). It developed over several years. Real estate prices started slowly increasing after the dot-com bubble. People were enticed to spend beyond their means by low-interest rates, easy lending restrictions, and little required down payment. It increased the price of homes even further. As the mortgage financing industry grew, it drew many new companies with resources to lend.
For the needs of the whole economy, several commentators claimed that monetary policy could be too expansionary. According to this theory, interest rates frequently serve as a gauge for the direction of monetary policy. Sadly, this often-cited indicator of the direction of monetary policy is also one of the least accurate. According to Chen, “With a national median asking price of $425,000 and a 10 percent down payment, that works out to an additional $1,117 every month” (4). Due to the incorrect assumption that dropping prices were a sign of an impending bubble explosion, the housing boom and recession were both misdiagnosed.
The increase in closed-access real estate’s market value reflected underlying economic conditions. Thus, the only way for fiscal policy to stop housing wealth from higher demand would have been to substantially slow down economic activity so that income losses outweighed the gains in household wealth. Some critics, however, support the idea that it would have been better to implement stricter governmental policies to slow down the rate of house starts during the boom (2). The most important principle for preventing upcoming real estate bubbles is the necessity of understanding the inherent challenges posed by the mortgage securitization process, particularly in times of crisis when delinquencies are at an all-time high (1). It remained consistent for both mortgage servicers and the legal frameworks in place to handle them, particularly in jurisdictions that use judicial foreclosure.
Therefore, a more fundamental question is if there is a political will to implement a countercyclical capital strategy. When the process seems to be going well, there will always be opposition to boosting capital requirements. For instance, the early 2000s featured rising home markets but a delayed recovery of the employment sector from the crisis. Raising capital requirements for all institutions to a level above what is anticipated in regular times would assist in identifying the inherent risk of a society that depends mainly on mortgage debt if the guts or political will to implement these actions is lacking.
Works Cited
CNN Business, 2018. Author: Lydia DePillis.
Bloomberg, 2022. Author: Ramesh Ponnuru.
Fox Business, 2022. Author: Breck Dumas.
The New York Times, 2022. Author: Stefanos Chen.