Housing Bubble essay

If 2007 saw the initial bursting of the housing bubble, then 2008 will only get worse as U. S. homeowners, realtors and banks all expect the worsening housing and credit crisis to roll over this year. The crash that the markets saw in early 2007 is just half of the picture, with Washington-based Fannie Mae predicting existing home sales in 2008 to drop 12 percent and existing home prices to fall by 4. 5 percent. Lehman Brothers analysts estimate about 1 million mortgage loans will default this year as compared to around 300,000 last year.

The few optimists have stood corrected in their predictions for a “soft landing” for the housing market, chief among them Federal Reserve Bank of San Francisco President Janet Yellen and National Association of Realtors former chief economist David Lereah. Median home prices declined in the U. S. this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors, bringing with it an ominous sign that it’s only a matter of time before the crisis spreads to other parts of the economy.

The housing slump feeds the huge sub prime mortgage crisis already in full blast, discouraging banks from lending and producing a vicious cycle of credit tightening. As interest rates go up from the credit crunch, sub prime mortgages whose rates reset this year find that as the value of their homes decline, the regular payments on their mortgages dramatically increase with higher rates that they simply can’t pay anymore. Even those who afford to pay suffer equity losses as the value of their mortgages exceeds the prices of their declining real estate.

This twofold crisis rears its ugly heads in the form of writedowns for lenders and builders alike. The five biggest U. S. homebuilders by revenue, led by Miami-based Lennar Corp. , recorded writedowns and charges totaling about $7. 5 billion this year for land that plunged in value. Meanwhile, mortgage companies, including California-based New Century Financial Corp. , the nation’s second largest sub prime lender in 2006, have filed for bankruptcy protection after borrowers were unable to pay their defaulted loans.

The domino effect is seen as the risks on these sub prime mortgages are condensed into collateralized debt obligations (CDOs) and mortgate-backed securities (MBS), which suffered severe plunges in value this year. This caused banks and other institutional investors, who in the past have bought and issued these securities at will to writedown and bring to their balance sheets the effect of the massive defaults housing mortgages are currently experiencing.

The ongoing writedowns claimed even very large institutions, with equally large casualties. Citigroup Inc. , the U. S. largest bank by assets, wrote down the value of these assets by $8 billion. Merrill Lynch & Co. writedowns cost the world’s biggest brokerage $8. 4 billion. Merrill Chief Executive Officer Stan O’Neal was relieved of his position, as well as Citigroup CEO “Chuck” Prince III, both perceived as failing to see the enormity of the financial mess the banks were embroiled in.

Other economies are feeling the effects of U. S. economic woes. Chicago-based Jones Lang LaSalle Inc. , the world’s second-largest property brokerage, predicts that investment in U. K. commercial real estate may slump 60 percent in the fourth quarter of 2007 as buyers shun large acquisitions of shops and offices. Spending on British commercial real estate may decline in the final three months of the year to ? 5 billion ($10. 2 billion) from ? 18. 6 billion pounds a year earlier. Falling prices are already hurting U.

K. property funds, for example Star Asset Management Group Ltd. said that value of its U. K. commercial property mutual fund was cut by 8. 2 percent after the value of its buildings dropped 18 percent since July. Even offices and apartments sales fell from a year ago, with U. S. office sales falling 70 percent in October from a year ago, industrial sales declined 24 percent and retail and apartment sales dropped 50, according to New York-based research firm Real Capital Analytics Inc.

The picture for the rest of 2008 looks grim for anyone who’s paying close attention to the economy. The housing market is no exception, and seeing as the bubble it created paved the way to what seems to already be a U. S. recession, there is a little reason to be optimistic now.


Taub, Daniel. “U. S. Housing Crash Deepens in 2008 After Record Drop”. 14 December 2006. Bloomberg. com. 11 February 2008. <http://www. bloomberg. com/apps/ news? pid=20601103&refer=us&sid=aFGRVkX98Hzw>