US Economy and the Housing Bubble

If we look at U.S. economy, we can see that it is substantially affected by Housing Bubblehousing sector, whether it is pushing it forward or holding it back, depending on few factors. Due to this, there have been two big, bubble bursts, with recession becoming a reality, in 1990 and 2008. This not only had an impact on the USA but on the world in general. And now, almost a decade after the last one, there has been more and more fear, that it might happen again.

So basically, a recession or housing bubble occurs, when there are financial excess one or more sectors. As we already said, housing is one of the most important, so people are fearing that some changes could lead to a crash are not wrong. So when a bubble bursts, prices have to rise even more than expected, and suddenly. Sharp raising is not a problem, that is normal, but once it goes over the expectations, therefore, a problem is created.

There are few options. If a price rise actually stimulates an increased supply as well, there is no fear of a financial crash, as the bubble will be disappearing very quickly. The increase in price actually affects, that mortgage loans actually turn into good one for the borrower, as he might be able to pay it off much faster. Though there is a presumption that prices can only rise, those are not true, as in from 2006 to 2012, rates were generally declining in some areas.

When talking about a new bubble we must take few things into considerations:

  • Before the 2008 burst, many deals were actually closed with almost no documentation regarding the mortgages, making it possible that a lot of people influence the market, causing an overheating. The situation has changed now, as there now exist certain mortgage underwriting standards.
  • Another fact that might actually tell us that we are far away from the bubble burst is that it is still more affordable to buy a home instead of renting a one. That would not be the case if we were facing a bubble threat.
  • Also, the actual imbalance that has formed between people trying to buy, and the ones wanting to sell the house, is not caused by unreal demands, but merely because there is a lack of labor, so there are not enough homes being built.

Additionally, there has been thinking that the cause of one burst and recession is unlikely to be a cause of next one, with an example that the 2000 bubble burst resulted from a technology crash, while 2008 was influenced by changes in the housing market. There are also few signs that real estate market is actually getting stronger, considering that prices are rising, and there are more people that are interested in being a part of that. Also, mortgage rates are actually being lowered, approaching the all-time low, which was at 3.1 % in 2012. The rates are currently 3.6 %, and there is no sign that it will change soon.

There is one great event that might have a significant influence towards the future of housing market, and those are the presidential elections happening in November. It will be important to see what kind of politics towards housing, considering that Donald Trump, a Republican candidate, made some statements that he would actually like that another bubble burst happens.

The changes that were made to the housing market, probably went too far, even slowing down the housing finance system, but for sure those made a kind of defense from another bubble burst to happen anytime soon.

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