U.S. Housing Bubble

(noun)

An economic occurrence affecting many parts of the United States real estate market in over half of American states; real estate prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012.

Related Terms

Examples of U.S. Housing Bubble in the following topics:

  • Securitization and the 2008 Financial Crisis

    • Unfortunately, the securitization of mortgages led to the U.S. housing bubble between 2000 and 2007.
    • A problem of the U.S. housing bubble was the banks relaxed their loan requirements.
    • During the housing bubble, several large U.S. banks relaxed their lending standards.
    • Investment banks profited from the U.S. housing market, contributing to the housing bubble.
    • Then the U.S. housing bubble deflated as housing prices began plummeting.

  • The United States Banking System

    • Comptroller of the Currency, an office in the U.S.
    • U.S. government imposed another restriction upon the U.S. banking industry – the McFadden Act.
    • This desire led to the U.S.
    • Housing Bubble that occurred between 1997 and 2007.
    • Reason 6: The U.S. government wants to protect consumers.

  • The Federal Reserve and the Financial Crisis of 2008

    • In late 2007, the bursting of the U.S. housing bubble triggered the worst financial crisis since the Great Depression of the 1930s.
    • However, following the crisis, the U.S. experienced very low levels of inflation, and cutting the federal funds rate failed to provide enough economic stimulus to get the country out of the recession.
    • This included bailouts of two housing finance firms - Fannie Mae and Freddie Mac - which had been established by the government in order to encourage home ownership and stimulate the housing market.
    • September 16, 2008: The Federal Reserve says the U.S. government has agreed to provide an $85 billion emergency loan to rescue the huge insurer AIG.
    • The Fed says the U.S.

  • The Financial Crisis

    • The result was a housing bubble, in which the value of homes rose year after year based on the ease with which people now could buy them.
    • The bursting of the U.S. housing bubble, which peaked in 2007, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.
    • In the U.S., Congress passed the American Recovery and Reinvestment Act of 2009.
    • The U.S.
    • However, the bailouts could not prevent a severe recession in the U.S. and world economy.

  • Corporate Fraud

    • Enron's managers invested Enron stock in the SPEs.As Enron's stock price soared, the SPE's finances remained healthy until Enron's stock price peaked at $90 per share.Once Enron's stock price began plummeting until it fell below one dollar per share in 2000, the SPEs earned substantial losses.Enron hid the losses and asked banks for more loans that would keep the company afloat, but Enron failed to obtain new loans.The U.S. economy entered a recession in 2001 after many internet companies bankrupted in 2000.A recession always exposes anorganization's weakness.Unfortunately, Enron employees' pension funds were invested in Enron stock, and many employees lost their pension funds and became unemployed.
    • Almost everyone in the financial world overlooked the SPEs, including Enron's auditor, Arthur Anderson, Enron's law firm, and the regulators from the Securities and Exchange Commission (SEC).Then the U.S. government passed the Sarbanes-Oxley Act in 2002, which required CFOs and CEOs to sign their company's financial statements.Law's goal was to increase transparency.Transparency means outsiders can look at an organization, and know therules and can accurately assess a firm's true finances.Unfortunately, Enron was "a black box,"and only a few insiders knew Enron's genuine financial picture.On the other hand, a nontransparent government tends to be corrupt.For example, if government officials do not write down the laws and rules, or the laws and rules are vague, subsequently, the bureaucrats have wide discretion whether to approve a business license or activity, fueling corruption.
    • The U.S. economy rebounded from the strong, overly optimistic real estate market.Everyone forgot Enron's misdeeds until the 2007 Great Recession, when the scale of fraud became much larger.For example, Lehman Brothers used exotic securities such as credit default swaps and collateralized debt obligations to buy real estate (Discussed in Chapter 18).After the recession had struck, unemployment doubled, and many households started defaulting on theirmortgages.Commercial and investment banks stopped lending overnight, and real estate prices began tumbling.Unfortunately, Lehman Brothers went on a spending spree, buying real estate toward the peak of the housing bubble.It held $768 billion in bank and bond debt while it had $639 billion in assets that dropped rapidly as real estate prices fell.Lehman Brothers filed for bankruptcy in 2008 and had closed its doors after 158 years of business.
    • Countries differ in corporate structure and planning.The U.S. corporations usually focus on short-term profits, and thus, they have problems with corporate fraud.On the other hand, the Japanese plan long term and they form a Keiretsu, a conglomerate of many companies with a bank member.Consequently, the bank could grant low-interest loans to its partner companies, and the Keiretsu usually focuses on long-term profits and market shares.Furthermore, corporations in South Korea, Germany, and Russia also established conglomerates, which are similar to a Keiretsu.
    • The U.S. investment banks, for example, were partnerships before the 1990s, and the managers handled money carefully.They were both the principal and agent.Then the managers converted the investment banks to corporations during the 1990s, and the managers gambled and took high risks while the shareholders owned the corporations.Investment banks became involved in the mortgage market in the early 2000s and were caught in the mania of the U.S. housing bubble.When the bubble deflated, the shareholders lost their stock value during the 2008 Financial Crisis.Finally, for one perverse example, GM cancelled its stock, and the shareholders lost everything during 2008.Remember, the corporate managers represent the shareholders and run the corporation on their behalf.

  • Regulatory Oversight

    • After World War II, the U.S. dollar became the international transaction currency.
    • Currently, U.S. banks pay modest premiums only on domestic deposits.
    • The U.S. government responded quickly, using the identical response many other countries had used.
    • Central banks from Britain, European Union, and Japan can borrow U.S. dollars from the Federal Reserve through the U.S. dollar liquidity swap.
    • A U.S. dollar liquidity swap is a central bank can borrow U.S. currency from the Federal Reserve by giving its own currency as collateral.

  • The "New Economy" of the 1990s

    • The "New Economy" refers to the U.S. transition from a manufacturing-based economy to a service-, information-, and technology-based economy.
    • This particular use of the term was popular during the "dot-com bubble" of the late 1990s, in which the high growth, low inflation, and high employment of the period led to overly optimistic predictions and many flawed business plans.
    • However, around 1995, U.S. economic growth accelerated, driven by faster productivity growth.
    • The U.S. also experienced increased employment and decreasing inflation.
    • However, U.S. investment in information technology has remained relatively strong since 2002.

  • Is the Federal Reserve Independent of the U.S. Government?

    • Low interest rates encourage people and speculators to buy houses, inflating both the housing bubble and housing prices.
    • The Fed is independent of the U.S.
    • If the Fed maintains a constant interest rate, and the U.S. government operates a budget deficit, the U.S.
    • Many Americans and experts believe the massive $17 trillion U.S. government debt will lead to inflation as the U.S. government forces the Federal Reserve to buy its bonds.

  • Growth Economics

    • The housing bubble of the 2000's is a recent example of a boom in the business cycle.
    • This requires converting the value of currencies of various countries into a selected currency, for example U.S. dollars.
    • One way to do this conversion is to rely on exchange rates among the currencies, for example how many Mexican pesos buy a single U.S. dollar?
    • For example, a table may show changes in GDP in the period 1990 to 2000, as expressed in 1990 U.S. dollars.
    • This means that the U.S. dollar with the purchasing power it had in the U.S. in 1990 is the only currency being used for the comparison.

  • The New Era

    • The 1920s marked a new era of postwar economic growth in the U.S., fueled by electricity and oil but marred by controversies.
    • New industries flourished, especially in the areas of electric power, automobiles, gasoline, tourist travel, and highway and housing construction.
    • In the U.S. presidential election of 1920, the Republican Party ran Warren G.
    • The fanfare was short-lived, however, as the Teapot Dome scandal tainted the reputation of the Harding administration when it was revealed in 1922 that Secretary of the Interior Albert Bacon Fall had leased U.S.
    • A dour, puritanical and spotlessly honest man, Coolidge’s White House stood in sharp contrast to that of Harding.