The Housing Crisis of 2007 was a massive economic meltdown that occurred when banks oversold mortgages in an attempt to satisfy the high demand for securities. Insurance companies, banks, and hedge funds influenced the subprime mortgage crisis. The financial institutions provided mortgage-backed securities while insurance companies provided credit default swaps. An asset bubble was created following a surge in demand for mortgages (Avery & Brevoort, 2015).
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The Federal Reserve increased funds rates influencing a sharp increase in the mortgage interest rates. The outcome was a sudden drop in the prices of homes and a subsequent increase in loan defaulters. The problem spread from the mortgages and banks to other sectors of the economy, where it caused a devastating impact. This paper explores the 2007 housing crisis and focuses on the current economic response.
Issues Influencing the Housing Crisis
The end of the Great Moderation and the peak of the housing market in 2006 influenced a decline in the construction of residential houses. In 2007, mortgage financial losses began hitting hard on the global financial markets, and by the end of the year, the economy was headed for a recession (Immergluck, 2009).
During this period, large firms were faced with financial distress marked by significant turbulence in financial markets. The Federal Reserve responded by providing liquidity as well as support from various programs to improve institutions and financial markets in a bid to rescue the entire US economy. Although the economy saw a great improvement in 2009, recovery was unusually slow in the subsequent years (Avery & Brevoort, 2015). Major reforms were witnessed in financial and banking regulation and congressional legislation, which adversely affected the Federal Reserve.
The Economic Response
Lenders offered high-risk mortgages repackaging loans into securities in the mid-2000s. It influenced an expansion of housing credit accessibility that fueled an increase in housing demands bidding up nationwide home prices. The period between 2008 and 2015 recorded a fall of more than 500 financial institutions following the negative impact of the economic crisis. Most of the affected organizations were regional banks that were later acquired by big banks together with their clients’ accounts.
The government bailed out big banks such as JP Morgan, Bank of America, and Goldman Sachs. There was a sign of recovery on capital stocks in 2014, but the labor productivity was depressed due to poor economic efficiency. The slow recovery was contributed by low labor productivity, which was estimated to be at 57% decline of the output growth (Immergluck, 2009). It influenced a reduction in hiring profitability and a decline in labor demand, which depressed employment.
The decline in labor productivity had a long-term effect on credit supply due to strict financial regulations as well as increasing risk in aversion. Although there was a decrease in interest rates, there were unfavorable lending and other collateral requirements. The effect was seen to start easing in 2014’s second quarter even though capital investment negative effects continued being felt. For instance, there has been a reduction in spending on research and development as well as new business entries in the market. The effect has been reduced innovation growth rate leading to permanent declines in economic efficiency.
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The economy is still struggling today despite the fact the crisis occurred more than a decade ago. The foreclosure mess is being experienced since many people are yet to own a home (Wang & Immergluck, 2019).
The problem is particularly affecting retiring citizens because most of them cannot afford to pay rent. Moreover, many homeowners continue recording poor credit scores, as they are unable to meet their debts. The foreclosure marked the beginning of extensive devastating economic issues that are difficult to address. Although the impact is diminishing slowly, many Americans are still losing their homes. The first half of 2019 saw about 300,000 foreclosures implying that the negative impact of the housing crisis is likely to take longer.
High unemployment is another negative impact of the housing crisis that the economy is currently suffering. The subprime mortgage meltdown increased the national unemployment rate to nearly 10%. According to the Bureau of Labor Statistics (2021), the rate has been declining where it stood at 3.6% in January 2020.
Moreover, significant progress has been attained in credit access and home loan approvals. The interest rate has reduced, making it possible for many people to borrow and repay in time. The economy has managed to maintain a recommendable inflation rate that is helping maintain the value of money. This implies that the economy is recovering, and it is likely to achieve improved growth in the future.
The 2007 housing crisis caused an economic meltdown following the sudden fall of house prices after a sharp decline in demand. People who had borrowed money to buy the asset defaulted after generating massive losses. The negative impact affected every sector of the economy, and its implication is still felt today. However, the economy has responded well by attaining a significant reduction in the rate of unemployment and interest rates and improved credit score and inflation rate.
Avery, R. B., & Brevoort, K. P. (2015). The subprime crisis: Is government housing policy to blame? Review of Economics and Statistics, 97(2), 352-363. Web.
Bureau of Labor Statistics (2021). The employment situation. U.S Department of Labor. Web.
Immergluck, D. (2009). The foreclosure crisis, foreclosed properties, and federal policy: Some implications for housing and community development planning. Journal of the American Planning Association, 75(4), 406-423. Web.
Wang, K., & Immergluck, D. (2019). Neighborhood affordability and housing market resilience: Evidence from the US national foreclosure recovery. Journal of the American Planning Association, 85(4), 544-563. Web.