Economics management assignment essay on: Housing Bubble
The housing bubble in United States refers to an economic bubble which affects majority part of the country. It has been seen that, in the year 2006 housing prices were at peak and it started to decline in the year 2006-07. In the year 2008, Shiller home price index was reported with a largest drop amongst the prices in then history. With an increase in the foreclosure rates within the year 2006-2007, the homeowners in US had led to high levels of crises in mid August due to the subprime. In the year 2007, the US Secretary of Treasury declared that “the bursting housing bubble has been rendered to be the most significant risk for the economy” (Shimizu & Watanbase, 2010).
A drop down within the US Housing Bubble will have a direct impact not only on the valuations of the house property but also on the nation’s mortgage markets, retail outlets, real estate, the home builders & the hedge funds held by big institutional investors, international banks & increasing in the risk during recession. The impact of collapsing housing as well as the credit markets over the US economy led the officials to decide upon a specified limit of bailout in the US housing market who are unable to pay their mortgage debts. In the year 2008, the US government allocated approximately $900 billion special loans so as to rescue from the US housing bubble. On 24th December, 2008 the Treasury department provided an extraordinary financial support for the next three years so as to acknowledge the excess of the $400 billion.
Some of the factors or characteristics attached along the housing price fluctuations have been discussed in this section of the essay. Firstly, market efficiency along with housing supply leads to high levels of fluctuations in the mortgage market. It has been seen that, efficiency in the US housing markets can be seen with respect to the changes in the price levels of the same. Based upon the survey conducted by Case & Shiller, it is quite evident that housing price index will have serial correlations with the rate of returns. Secondly, housing demand & prices will also lead to high levels of fluctuations within the same. In order to realize the effect of baby booms as well as a burst on the future, as study was conducted which estimated age by age population changes as well as predict the future housing prices (Koller & Cynthia, 2012). As a result it has been estimated that, housing prices will decline up to 47% in the years ranging from 1987 – 2007. Based upon the report it has been analyzed that, change in the housing demand will affect the rental house market, housing demand alone will not affect the housing prices as the prices of the houses change with the demand changes.
The two measures which have been discussed above in this essay support the notion of the home price bubble as well as suggested that the prices of the buildings are likely to decline in the near future. But there are two flaws attached to it. They have been highlighted in this section of the essay. Firstly, the interest rates will lead to high levels of problems which might create bubbles & influence the ownership & affordability (Economic Scenarios. Com, 2005). A decline in the mortgage interest rates has led to high levels of implications for the ownership of the house (Home-Price-to-Income Ratio) & equilibrium return on housing (Rent-to-Price Ratio). Secondly, the home price index will help in order to calculate the ratios which will have an impact over the conclusions derived from the same. Taking into account the influence of decline in the interest rates of the mortgage as led to an entirely different assessment of the same. Therefore, a ratio between the annual principal as well as the interest payments shall be done. This ratio has been quite stable for quite a long time. Hence, this affordability ration will suggests a standard single family home which would be quite affordable from the cash flow even when the prices have increased lately.
(Source: Case, Quigley & Shiller, 2001)
Secondly, rent-to-price ratio would be used in order to support the view point of home price bubble. It attaches two flaws with it, i.e. OFHEO index & significant decline of interest rates. It must be seen that, OFHEO is a constant quality price index & has been designed in order to capture the implicit rent of the quality owned housing unit. Hence, in rent to price ratio, the numerator as well as the denominator remains inconsistent. This ratio would be derived from constant quality new home prices which have declined in the past years & remains within a specified range. It shall also be taken into consideration that while measuring this ratio, home prices are not considered to be out of the fundamentals.
Therefore, it can be concluded that, the US housing markets within the recent years will have a little evidence to support the housing bubbles. In spite, it shall be taken into consideration that the prices of the houses have increased with an increase in the levels of personal income of the individual & decline in the interest rates. Based upon the observations it can also be concluded that, weakening the fundamentals have been termed to be less volatile as compared to the asset prices. Furthermore, there are other reasons which have led to high levels of speculations within the housing market. Hence, bursting of the US housing bubbles will have serious & adverse effect over the economy as a whole, based upon the work done by IMF the main reason for the same is unnoticed, but bursting of the housing bubble might be sufficient to put US into recession in the later years (Amrine, 2010).
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