The Housing Market

By Kendall Thigpen and Rohit Shankar

Today, the housing market in the United States is simply in shambles. There were many factors that contributed to the collapse of one the most important parts of America’s Economy. The main contributor to the downfall of the United States housing market was increased lending by banks to unqualified borrowers. Borrowers were often unable to pay back these loans because they lacked the resources to pay off their debts.
After the recession in 2001, the housing market surged . Demand for homes was at an all-time high. Also, home prices were on the rise which meant people thought that purchasing homes would be a good investment for the future as they were certain that their house values would continue to go up. In order to purchase these homes, home-seekers looked for loans from banks. However, many of these future borrowers were unqualified to take on the mortgages supplied to them by banks. In an effort to thwart this problem, banks set up Adjustable Rate Mortgages. These ARM’s had low interest rates to begin with, but after a set period of time the interest rates would increase leading to the borrowers being unable to pay back the loans. Borrowers and the banks had assumed that the value of the houses would rise and the borrowers would be able to take out new loans to replace the old loans. In 2007, there was 1 trillion dollars worth of these ARM’s due back to banks. Millions of over-leveraged homeowners had defaulted on their mortgages putting pressure on the banks, which sent the economy into a tailspin.
As the housing market boomed, many contractors sought to satisfy this increased demand. The result was a large amount of homes being built in growing markets such as Las Vegas, later to be left vacant due to a lack of purchasers of property. The increased supply caused a drop in prices across the board in the housing market, and many home-owners were losing significant value in their homes. This meant that the mortgages that homeowners owed were generally more than the house’s worth. By the time the housing “bubble” deflates millions of working-class Americans who took out ARM’s will be left to pay off loans which will create a deeper divide between middle-class and the wealthy.
To sum up the whole housing market crisis in terms of supply and demand, the demand for houses increased due to people’s speculation that house prices would keep rising. With such a big increase in demand for houses, contractors started building houses to the point where they oversaturated the market with homes. Too many houses were built, and there were not enough buyers in the market. This caused the price of houses to drop. This was a problem for the people who had taken out home loans because they ended up paying more for the mortgage than what the actual house was worth. Also, with the ARM’s resetting to higher rates, a lot of people could not afford to pay back the loans and were forced to foreclose on their new homes. If the banks did not lend money out to unqualified borrowers and contractors did not flood the market with excess houses, then this whole housing market crisis could have been prevented. Housing conditions may not improve for several years and the housing market must make a strong comeback to help stabilize the US economy.


Info source: http://www.marketoracle.co.uk/Article383.html