Speculative Housing Bubbles



Speculative Housing Bubbles

Introduction

Most financial crises have been associated with the formation and collapse of a speculative bubble in the price of any asset. Assets may be financial, such an action, or non-financial, such as a home or a commodity. It may also be the exchange rate, in which case it takes the name of crisis. The collapse of the housing bubble in 2006 precipitated the financial crisis of 2007. Financial crises usually follow a bubble in the price of an asset. The development of the bubble is based on three beliefs: the expectation that the price will continue to rise in the future, the opposite belief, i.e. it will not fall, and the fear of losing the opportunity. If a large group of buyers think the same, then the largest purchase effectively raises the price, without having any basis whatsoever, beyond belief.

A housing bubble is a bubble that appears on a local area or across the territory of a real estate market. It is characterized by a rapid increase in the value of the property. It features a large and persistent gap between the price of an asset (property) and the temporal variation of its fundamental determinants.

In 2007 came the moment when the bubble deflated housing prices fell rapidly to be worth less than the outstanding loan value. Debtors stopped paying the credit and housing were seized and auctioned dragging even lower the price of the same. Financial institutions began to waive mortgage payments, to replace them with foreclosed homes now worth less than the loan, to have problems in their financial statements by reducing assets and losses generated by dragging pass-holders the PTS and CDS. As a result, financial institutions began to reveal toxic assets on their balance sheet insolvency creating many, some of which are driven to bankruptcy. Insolvency, bankruptcy, fear of impaired assets, and the fear of losing money deposited generated widespread panic that swept the world in passing the liquidity of the financial system and thus investor confidence. Is the current state of the situation in September 2008.

Discussion and Analysis

The global financial crisis of 2007 was comparatively recent in origin as compared to other financial crises, and is possibly persistent until now. It was triggered by increasing defaults on subprime mortgages and the disruption of the markets for mortgage-backed securities. The financial crisis took root in the United States of America, and spread to the United Kingdom and other countries the world over. The origin of the bubble base took place due to an excessive growth of credit, helped by low interest rates that have been established in the major economies of the world. The crisis began in summer 2007 because of "subprime" mortgages made to the American middle class. Normally, an individual who wishes to acquire an apartment can borrow based on salary and ability to repay.

The worldwide economic and financial disaster affected the United States' residential housing marketplace which is in a serious condition. In addition to this, the boom and ...