The Housing Bubble

Topics: Subprime lending, Subprime mortgage crisis, Mortgage Pages: 3 (992 words) Published: June 6, 2010
The Housing Bubble: America’s Downfall
Linda Smith
Professor Bolden

Abstract

A housing bubble is a situation where there is an extremely high demand for housing, but this demand is created through artificial ways, like lowering interest rates. The interest rates are lowered to create a false sense of security for consumers and can lead to economic boom. Also, as we are learning the hard way in the United States, it can end in economic hardships.

Most Americans would tend to agree that the housing bubble has affected all of us in some way or another. Whether we lost a house, a job, or a business it affect us. The housing bubble gave most Americans a false sense of security to spend money that they really didn’t have. Americans that could not afford homes in past were acquiring loans with creative lending practices that led them to later on lose their American dream or struggle to keep it.

According to (Black, K., n.d.), one of the main reasons a housing bubble is created is due to a desire by a national bank, such as the Federal Reserve in the United States, to lower interest rates to spur the economy. This creates an interest by some to purchase real estate because it becomes cheaper to acquire that real estate. Therefore, demand goes up. Added to this is the practice of house flipping, in which a home is bought for short-term gain, and the market is further inflated by an artificial demand. As demand increases, prices increase -- substantially more, in some cases, than what may be considered the fair market value.

A housing bubble creates a beneficial financial situation for other businesses as well. Construction companies, plumbing companies, electrical companies, engineering companies, and home builders were so busy with work that they had to hire many employees to keep up with the boom. This housing bubble created a circular glow of production and income for our economy. The problem is that this beneficial situation is short lived....


References: Black, Ken (2003-2009). What is a housing bubble?
http://www.wisegeek.com/what-is-a-housing-bubble.htm, retrieved 11/29/09
Cornett, Brandon(12/18/07). Subprime mortgage crisis explained. http://www.homebuyinginstitute.com/homebuyingtips/2007/12/subprime-mortgage-crisis-explained.html, retrieved 11/29/09
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