How Regulation Helps Real Estate
The housing crash of 2007 was caused by a number of factors, but shady lending practices were mostly to blame. Moderate deregulation of any market allows it to thrive, but conditions provided in 2007 were too relaxed. There was a housing bubble created by incredible incentives for people to buy.
There were condos going up in neighborhoods that were once stricken with poverty, and everyone was buying a single family home.
“The first one gets the oyster the second gets the shell.” – Andrew Carnegie
What happened to the real estate market?
From 2003-2007, sub-prime loans nearly quadrupled to more than 1 trillion dollars in total loans. These loans were already granted to people with questionable credit, and many of them were offered at a varying interest rate. As the banks began to lose money on defaults, they were forced to increase the interest rates of others. Rising mortgage payments caused more foreclosures which seriously devalued the properties across the country.
People aren’t willing to pay $200,000 for a duplex if the foreclosed home next door and across the street are both selling for $50,000. Suddenly, neighborhoods all across the country saw the value of their homes plummet while the banks continued to raise the adjustable interest rates. Sub-prime lenders the world over began to fold beginning with American Home Mortgage and the housing crisis began.
Real Estate’s Effect Upon the Economy
Real Estate is one of the biggest supplier of jobs in the US, and the failing housing market lead to epic job losses. Ramped unemployment meant people suddenly had less revenue to spend so the stock market began to loose volume. A weak market lead to even less jobs and more homes in foreclosure. This cycle of disaster spiraled downward until the economy hit its lowest point since the great depression. On October 10th 2008, the Dow Jones Closed below 8500 after losing nearly 1/4 of its volume the previous week. Jobs became a scarce commodity as high school dropouts competed with those with masters degrees for the same positions.
Even those with fixed mortgage rates were unable to make their house payments which only fueled the decline. Banks that didn’t engage in sub-prime lending began to see their loans go into default.The government is forced to lend more $1 quadrillion dollars to keep the automotive and financial sectors from collapsing.
The housing collapse was caused by excessive deregulation which allowed banks to balloon the market up to unnatural proportions. When this balloon pop, the tax payers were left with a hefty bill. Many of them were also left with no place to live when the housing market collapsed.