Global economy had experienced the worst recession in decades during 2008 till 2009 (Nouriel, 2009). Fear and panic were surrounded among people. During those days, the main headline of newspaper is about share market decreasing, industrial growth decreasing, and overall instability of the economy. Rumors are thick and flying, as a result, it create more fear among people and households about their savings and hard earned income. Most countries are affected by the recession, especially the developed country, United State (US). For example during May 2009, US housing sector had face a declined of sales, which was 79%, much more than from its peak in 2006 (74%) and became lowest in the history (Xinhua, January 21, 2010). While, stabilization in construction activity and housing prices has come during the mid of 2009, when a turnaround had emerged in housing sector. Besides, a global financial meltdown had affected world stock markets facing huge fallen, large financial institutions have collapsed and world’s wealthiest nations’ governments have to come up with strategies and resolution in order to bail out the financial systems (Anup, 2009). United Union has forecast that in 2010, the world economy is toward a mild growth of 2.4% (Xinhua, January 21, 2010).
1.1 How Did the Downturn Start?
The crisis bursting can be caused by many reasons, inflation, increased unemployment, high oil and food prices, declining dollar value. However among the reasons, it can be concluded as due to the US housing bubble which peaked in 2005 to 2006 (Wikipedia, 2010). US economy is built on credit, therefore credit is a great tool in US and is used wisely. People can easily get credit to start or expand a business. Besides, crediting can be used to purchase luxury goods or assets such as houses or cars. In addition, the combination of low interest rates and large inflows of foreign funds had become the reason for people to do loans for doing investment or speculation (Ryan, 2009).
When there are enough funds, there will be enough money to lend to potential borrowers. Loan agents definitely were asked to look as much potential borrowers or home buyer as possible in turn to get big sum of incentives or commission. Therefore, low interest rates or cheap credit systems were launched. An increase in marketing on loan packaging and incentives such as easy initial requirement or a long-term trend will be given when raising the total loan had given. This encouraged investor assumed that they are able to increased property value to refinance their homes with lower interest rates and take out the second mortgages and use the funds to refinance or to purchase another house for the sake of investment (Wikipedia, 2010).
When cheap credit created more money, definitely people spend more the money. In turn, overbuilding of houses during the period had finally led to a surplus inventory of homes. Beginning from the summer of 2006, home prices started to drop moderately (Victor, Sonal, Sreekanth et al., 2009). Refinancing became more difficult, loan rates reset to higher level interest rates and also the payment amount, heavy losses in mortgage and many banks and investment firms began losing money in directly.
Housing price declining slowed growth of new home building, meaning that the housing market value was worth less than the mortgage price (Ryan, 2009). As compare to 2006, sales volumes of new homes were declined by 26.4% in 2007 of the excess supply (Victor, Sonal, Sreekanth et al., 2009). During March 2008, an estimated 8.8 million of US homeowners were believed that had the negative equity. Instead of paying high interest rate which unaffordable, many people choose to just go off.
(Sources: http://www.globalissues.org/article/768/global-financial crisis#Thefinancialcrisisandwealthycountries. By Anup Shah, 2009)
Figure 1: Global Financial...