Recently, there have been discussions on the behavior of the housing market in the United States. The common issue is whether prices have risen too high and the factors leading to the situation. According to Schelkle (2018), housing prices between 2002-2005 exceeded individuals’ actual purchasing power, resulting in more people becoming homeless. This paper provides a general view of the factors that led to an increase in property prices during this period, mortgage default rate, and the Community Reinvestment Act’s impact on the housing bubble.
Housing prices skyrocketed between 2002-2005 for various reasons, not limited to migration and availability of funds for investment. First, most individuals were migrating to the US in search of better jobs; hence, there was an increase in demand for houses. Specifically, the movement led to a short supply of homes, and the ones available in the market were overpriced. Additionally, banks made it easy for individuals to access credit for their mortgages, increasing many people’s possibility to own homes. 2001’s recession also prompted the federal government to use a highly expansionary monetary policy. Most of the adopted policy changes led the federal government to change interest rates to the lowest recorded US history levels (Chen & Fik, 2017). As a result, decreased interest rates encouraged many individuals to venture into real estate investments. Overall, the increase in demand for houses automatically led to a rise in rental prices.
In the years 2006-2007, the mortgage rates in the United States increased rapidly due to various reasons. First, many people were living at low standards, and they could not repay the mortgage. The situation led to the mortgage default and housing disclosure rates to increase between 2007-2008 (Schelkle, 2018). Low-interest rates motivated people to invest in houses, hence increasing the availability of homes. The situation led to the emergence of mortgage-backed securities financed with short-term leveraged lending (Schelkle, 2018). As a result, there was a high mortgage default rate. The situation also caused a decline in the value of mortgage securities. Finally, credit standards, including the creditworthiness of loaners and minimum down payment, had initially fallen, increasing demand for mortgages in the subsequent years.
The Community Reinvestment Act (CRA) started the initiative and encouraged banks to lower their interest rates to accommodate each community’s low-income earners. The banks which formulated the CRA on loans had estimated that the default rate would increase due to lax lending standards. They later realized that low-income borrowers exhibit unexpected commitment to pay for their mortgages (Ringo, 2017). Moreover, banking institutions adjusted their belief and started issuing money to low-income employees. This was after realizing the borrowers were in a position to pay their loans despite experiencing high Loan-to-Value ratios (LTVs), unconditional income, and low-down payments.
Further, the CRA Act prevented banks from redlining poor neighborhoods. Initially, banks were not supposed to accept mortgages from any individuals residing in the delimited areas. The Community Reinvestment Act encouraged those depository institutions to help poor communities, including the limited ones, with safe banking operations to meet their credit demands. They mainly targeted the institutions to help those people who lived near them. The target populations could not access loans initially due to their financial status, including low- and moderate-income neighbors.
In summary, housing prices have been on the rise in many countries across the world. Many people are migrating in search of better jobs, hence, there is an increase in demand for houses, since they should live somewhere. With most individuals being low-income earners, mortgage-backed security finance has emerged to assist individuals to own houses. The Community Reinvestment Act has been helpful as it has encouraged banks to lower their interest rates to accommodate each community’s low-income earners.
References
Chen, Y. H., & Fik, T. (2017). Housing-market bubble adjustment in coastal communities: A spatial and temporal analysis of housing prices in Midwest Pinellas County, Florida. Applied Geography, 80, 48−63.
Ringo, D. (2017). Mortgage lending, default and the community reinvestment act. Web.
Schelkle, T. (2018). Mortgage default during the US mortgage crisis. Journal of Money, Credit and Banking, 50(6), 1101−1137.