U.S. housing market-boom or bust Essay Example | Topics and Well Written Essays - 1000 words

U.S. housing market-boom or bust - Essay Example The US housing market, once on its boom has witnessed a sharp decline in recent time which in effect has contributed to credit crunch for banks, pressure on currency or value of dollar in US, falling stock market, job cuts and global economic slowdown.But such was not the situation a few years back when the US housing market was at a BOOM.Looking back at the period of boom for the housing market in US we see that the interest rates were low according to the policies of Alan Greenspan, chairman Federal Reserve. In addition to prime loans, a lot of banks gave sub-primes loans to a great number of people. As the sub-prime loans increased, more people invested in property, bought houses to live in or rented them out. This was the time when the property prices were increasing. As the property prices increased, the value of the mortgage also increased, hence this lead to more borrowing and more sub-prime loans while the prices of property continued to increase.All that was happening till n ow was happening for good. But then the housing market took a different direction. The prices of property which was steeply increasing started to look more stable or flatter. This induced speculative buying and attracted a lot of sellers to the market. As the number of sellers increased due to speculation, the prices started to come down. This had a spiral effect and further decreased the prices with more people on the selling side. As the prices reduced, the value of mortgages also decreased often coming to a point lower than the loan provided. With buyers unable to pay back and value of mortgages lowered, the number of defaulters increased. With increased defaulters, the banks also came to the markets to sell the property against which the loans were taken. With more buyers, the sharp decline in housing markets was further ignited bringing the housing market of United States from a boom -to a bust. "Housing sales and prices in 2007 were much weaker than in 2006. The US housing industry in 2007 is in the deepest decline in 16 years." (Victor Sula, 2007) Some people blame the government and the policies for such a meltdown of the housing industry. They think the policies were not right to begin with and now nothing can be done to fix the damage already done. Also they blame the policies for the increased gap between the rich and the poor. This was not the end of the story. The decline of the housing market had further repercussions. With the housing market crashing, the credit worthiness of banks decreased. Increased number of defaulters meant more bad debts. This caused the decline of the stock market which of course affected other sectors as well. Investment was the main target. With the stock market in the home country in not such a good shape, investors started taking their investment outside the United States and foreign investment into United States also declined. This had an immediate effect on the value of dollar. This creates a problem with two solutions but both solutions present a loss to Americans. On the one hand, investors can be attracted by increased interest rates but housing market will go down faster. With lower rates investment will be lower. Also another factor with respect to investment that is taking place is that investors with the lowering price of dollar are investing in commodities like oil and petrol which in their view are safe and as a result the oil prices further increase. "Foreign investment is drying up and the world is no longer eager to purchase America's lavish debt. The only thing the Federal Reserve can do is raise interest rates to attract foreign capital or let the dollar fall in value. (Mike Whitney, 2007) Another effect was felt on the job market. With banks facing a credit crunch, there were a lot of job cuts putting a lot of people on the streets and curtailing their purchasing power. Job cuts were also taking place from other sectors such as automobile which contributed to the slowing down of economy and the houses now are selling much