Today economists widely discuss the perspectives and the first indicators of the development of the new global financial crisis which can influence all the economical and social fields. That is why it is necessary to examine the previous experience and the economical background of the countries and focus on the causes of the crisis of 2007-2009 in order to prevent the progress of the critical situation and overcome the most dangerous effects nowadays.
Many researchers agree that one of the main causes of the financial crisis in the USA in 2007-2009 was the housing crisis which contributed to the development of the problem and to the increase of risky tendencies. The housing crisis of 2006-2008 should be discussed as the process which includes two main stages which are the formation and the burst of ‘housing bubbles’ and the following subprime mortgage crisis.
To understand the peculiarities of the crisis, it is necessary to concentrate on the characteristics of ‘housing bubbles’ typical for the US economy of the 2000th which ‘burst’ caused the development of the following crisis.
It is important to notice that ‘housing bubbles’ are rather speculative in their nature, and they are characterized by a range of such features as the rapid and enormous increases of the valuations of property, and it usually ends in the immediate drop of the prices which can lead to the borrowers’ crisis because they have no the opportunity to pay for their property according to the mortgages (Bhattacharya).
The housing crisis in the USA was not the crisis of building companies or of the housing rent market. It was the result of bursting ‘housing bubbles’ which were based on the fictitious funds which actually were not connected with the real prices for the property and real borrowers’ incomes.
Today economists accentuate a number of causes for the development of housing crisis in the USA. According to Goodman, these causes are “high default transition rates, low cure rates, and longer liquidation timelines” (Goodman 27). However, this characterization of the causes is rather limited.
In his works, Stone focused on the controversial aspects which can be considered as some of the main conditions for the beginning of the crisis. He developed such influential factors as the wide income inequality in the housing industry, the facts of persistent racism in housing provision, the discussion of housing as a speculative commodity, and as a result, the overdependence of housing financing on debt capital markets (Stone).
“Taking these three elements together, no sector of the economy has been as dependent on debt as housing” (Stone 36). Moreover, in his works on the issue of the housing crisis, Stone presents the complex analysis of the major causes of the misbalance in the economy of the housing sector in the country.
The crisis developed according to several stages the main phases of which were the burst of ‘housing bubble’ and its effects. The housing boom ended in 2006 when “the share of subprime mortgages in total mortgage originations reached 20 per cent”, the prices reached the peak and then declined in the same year (Bardhan 3). 2007 could be characterized by numerous defaults and foreclosures, and in 2008 the whole financial system of the USA began to suffer from “collapsing transactions in derivatives” (Bardhan 3).
In 2006 in the situation of the continuous growth of the prices for real property Americans were ready to take loans under any conditions because they were sure that they could return the money with the help of definite financial operations and even make some profits. Businessmen concentrated on the constant increase of prices without paying attention to the fact that this process cannot be endless. As a result, the amount of loans which were not supported by the real incomes of borrowers increased greatly (Prassas).
Thus, in the situation of the open competitiveness banks did all possible to attract the clients and gave the loans without consulting the information about their incomes. Derivatives from mortgages were popular with the public. They were bought in order to get the definite income. The facts of the increase of these incomes persuaded the public to buy more, but this effect was not long. There were more and more derivatives, the difference between the speculative and fictitious capitals, delinquencies and foreclosures grew.
It was the first step to further developing the situation with delinquencies and foreclosures because in 2008 the prices for the real property rapidly decreased, but the sum of the necessary repayments increased. Now a great number of Americans could not pay for their loans (Bhattacharya). Analyzing the progress of crisis, Stone accentuates that “borrowing far beyond any realistic potential of repayment – built on the myth that residential property values always and forever rise – a classic bubble” (Stone 36).
It is possible to discuss the consequences of housing crisis in the USA from two opposite positions. Many economists accentuate that there are no positive tendencies in the crisis’s consequences. The decline of housing prices resulted in rising foreclosures. Many organizations specialized in credits, financial entities, and investment banks became bankrupts. The negative results of the crisis were also connected with the main government-sponsored enterprises, Fannie Mae and Freddie Mac.
The threat for the investment companies created the dangerous situation for the whole financial system of the country which also broke the relations with the international investors (Bardhan). “Credit markets became nonfunctional, rate spreads between risky and risk-free government debt skyrocketed, and the entire financial sector effectively became not just illiquid but insolvent” (Bardhan 3).
Nevertheless, it is important to make the accents on the fact that the housing crisis was not spread on the private commerce because of the differences in realizing the main principles of the development and financing (Bardhan). That is why the problem of housing crisis is predominantly associated with the average Americans who bought the real property taking credits and had no money to pay for their loans after decreasing the prices on property.
However, several positive trends in the housing market can be observed. “Prices have fallen significantly, housing is more affordable now than at any time in the past two decades, and the tax credit for first-time homebuyers has helped spur purchasing” (Goodman 26).
Thus, two indicators of the crisis in the field were determined by the investors who suffered from their results significantly. They focused on the increase of “the number of loans in delinquency or foreclosure” or the “housing overhang” and the growth of a number of the borrowers “with negative equity who are likely to default” (Goodman 26).
To fulfill all these conditions for the development of the crisis, it is necessary to create the critical situation depending on the growth of the housing occupancy and debt costs which is accompanied with rising property taxes, the high leverage supported by the decline of prices on the real property, the general decline of personal incomes which leads to the inability to pay for mortgages, and as the decisive factor, the decrease of the real property values (Stone).
The threat of bankruptcy made the companies which function in the field of housing market and banks make definite decisions in order to solve the consequences of the crisis. The situation results in the progress of different systems which could contribute to overcoming the crisis:
In order to continue to qualify consumers for the purchase of a home, and to help drive the housing market, lenders offered more creative financing options, such as 40-year mortgages, interest-only loans, and jumbo loans, in addition to the typical business practices of offering loans based on fixed- and adjustable-rate mortgages, refinancing, and lending on the basis of home equity (Prassas 40).
To overcome the problem of foreclosures and delinquencies, banks implemented a range of definite strict measures according to realizing the credit conditions for all the companies, in spite of their paying capacity. There are also several visions of the question of possibilities to predict the development of ‘economic bubbles’ and that is why to prevent the causes for critical situations in economy. The solution of this question can help to prevent global economic crises.
The lessons of the housing crisis in the USA in 2006-2009 can be considered as effective for analyzing the situation and developing the range of measures in order to be able to overcome and even predict the development of the negative tendencies in economy in the future.
Bardhan, Ashok. “Housing and the Financial Crisis in the US: Cause or Symptom?” The Journal for Decision Makers 34.3 (2009): 1-7. Print.
Bhattacharya, Subhrendu. “Accelerated Trade in Housing Industry: An American Challenge in Recent Times”. Journal of International Economics 2.1 (2011): 76-84. Print.
Goodman, Laurie. “Dimensioning Housing Crisis”. Financial Analysts Journal 66.3 (2010): 26-37. Print.
Prassas, George. “Employment in Financial Activities: Double Billed by Housing and Financial Crises”. Monthly Labor Review 134.4 (2011): 40-44. Print.
Stone, Michael E. “Housing and the Financial Crisis: Causes, Consequences, Cures”. Housing Finance International 24.1 (2009): 34-39. Print.