The US housing bubble

In recent 100 years, the two largest economic crises in the world were all triggered by the US bubble burst. The Florida housing bubble burst led to the crash of Wall Street stock market and great depression from 1929. In addition, another housing bubble burst led to a worldwide financial crisis from 2008. This part will focus on the second housing bubble as it reflects more issues.

At the beginning of 21st century, with the dot-come bubble and 911 attacks, the economy of US was in contraction. In this background, the Federal Reserve had to carry out the low interest rate policy to stimulate consumption and improve the economy. In 2004, the interest rate dropped to 1% and people were more likely to purchase the real estate by home mortgages(more detail click here). In this way, US home prices were doubled as much as 2001 and government began to adopt tightening interest rate to raise the interest rates. In 2006, the Federal Reserve raised the federal funds rate by 17 times and the proportion of sub prime mortgage loans accounted for the national home loans from less than 5% to 20% between 2001 and 2006.

Compared with the common loan, the sub prime mortgage loan has a lower requirement of the borrowers’ credit history and repayment ability, while the loan rate is much higher than the average mortgage(more detail click here). Therefore, people who have lower income or poor credit history will apply for sub prime mortgage loan. Moreover, mortgage companies, banks and other financial institutions package these sub prime mortgage loans into mortgage-backed securities then resell to other investors, it is the so-called securitization. At that time, the sub prime mortgage loan made the incapable buyers to purchase and a short-term shortage in the real estate market. People and financial institution were all crazy with investment and speculation without thinking about the potential crisis.

Facing the dramatic rise of housing price, the US government has to control the market. With the increase of short-term interest rates, the sub prime mortgage repayment rates have also increased significantly. Meanwhile, the decreasing price in the real estate market makes the buyers hardly to refinance through sell or mortgage their house. It results in numerous borrowers cannot pay their loan on time or even default loans. Although banks repossess houses while cannot sell them out at a high price. Due to a large amount of losses and bad debt appear and the crash of the sub prime mortgage derivatives, the housing bubble finally bursts.