Economic Analysis
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Economic Analysis
Summary: The Housing Bubble
The United States has been on a slow but steady path of economic recovery following the far-reaching recession of 2006 and 2007. A major catalyst of this economic recession has been the housing bubble that began in earnest in 2006. In the years that followed, starting from 2007, the properties markets started to experience reductions in valuations and overall prices of houses leading to the historical lows of 2012. Owners of property, and especially homeowners, were left holding on to investments that had seen extended reductions in net valuation, thus greatly eroding their overall wealth and jeopardizing their financial wellbeing. This has continued to be a major economic issue in the United States in recent times as the housing markets are yet to recover. Homeowners, who had essentially taken on extensive mortgages on their previously highly-valued homes, still continue to suffer foreclosures as the banks move to collect their dues.
Underlying Economic Principles
There are various ways of assessing the housing bubble of the early 2000s, and its subsequent burst in 2006, from an economic standpoint. First, the housing market had continued to enjoy marked growth in the years running up to 2006, beginning from the Clinton Administration. At this time, houses were highly valued, and the more lucrative the industry continued to appear to potential investors, the higher the property prices rose. The basic economic principles underlying this fact are the microeconomic essentials of supply and demand.
In a perfectly competitive market setting, such as the housing market, there are many buyers and sellers. Their actions within these markets are, therefore, capable of influencing the prices of goods and services. In the case of the properties markets, there were essentially many buyers and fewer sellers in the run-up to 2006. This led to a steady increase in property prices as the market forces, aptly called the “invisible hand” by Adam Smith, corrected them to attain the microeconomic concept of market equilibrium.
The Dynamo Effect
The increase in overall property prices, especially those in the housing market, created investor confidence throughout the economy. This then resulted in an increase in risky behavior among some of the investors, such as an increase in the practice of leveraging. For example, homeowners began to mortgage their houses at extremely high rates, thus opening room for a wave of economic activity within the financial markets. Financial institutions started to create innovative investment portfolios from the increasing number of mortgages, such as the mortgage-backed securities, further catalyzing price increases throughout the property markets.
Demand for the mortgage-backed securities began to outstrip supply owing to the limited number of prime mortgage, on which these securities were hedged. Subprime mortgage lenders began to emerge to fill in the gap, creating a lot of risky asset-backed securities that soon led to the collapse of the mortgage industry due to high rates of default among the subprime borrowers. Eventually, the housing bubble burst under the weight of the subprime mortgage crisis. Several homeowners then failed to meet their mortgage obligations and had to forfeit their houses to the banks that extended the loans.
Personal Expectations from the Class
I expect this economic analysis class to equip me with the necessary tools, with which to assess the performance of the economy both qualitatively and quantitatively, given a set of measurable and describable parameters. In essence, I expect to understand the methods of formulating theoretical and mathematical models through which to summarize a given facet of the economy, based on an array of known or predictable factors. I also expect the course to enhance my critical thinking skills as I learn how to analyze the results of the theoretical and mathematical models used to describe the economy or parts of it.