The 2008 Housing Crisis: A Brief Overview of Causes
In 2007, the U.S. fell into a deep financial recession. One of the main causes of this was the bursting of the housing bubble, which lead to a housing crisis. What is a housing bubble? A housing bubble is defined as “a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices” (businessdictionary.com 2014). When the bubble bursts, the result is a quick decline in home prices (businessdictionary.com 2014).
In the U.S., a housing bubble began to emerge just after the turn of the 21st century. In these years, the economy was in great shape, interest rates were low, and consumers were ready to buy, which drove up real estate prices very quickly (Trehan 2007). Houses were viewed as an excellent investment by home buyers and lenders alike. However, the bubble eventually burst, and housing prices dropped drastically, leaving homeowners unable to afford their mortgages. Financial institutions were hit even harder, with many on the verge of bankruptcy, or failing because of the underwater mortgages (Melicher & Norton, 2014, p. 44).
Leading to the bursting of the housing bubble were three major contributors: a cultural change in American society, low interest rates, and subprime lending by financial institutions. There is also speculation that the Federal Government played a part in creating the bubble that would eventually burst. These events coincided to create the 2008 housing crisis. Many people ended up with homes they could not afford, and lending institutions ended up with homes that were underwater.
At one time, Americans were known as people who saved money. This was true during and after WWII, when people began purchasing government savings bonds at rates between seven and eleven percent (Garon 2012). The savings rate by the 1960s was seven to eight percent (Melicher & Norton, 2014, 168). This was a period when people would save to purchase wanted items, like cars and household goods. If you didn’t have the money to buy it, you couldn’t afford it, therefore, it wasn’t purchased. Credit cards were not common during this period. First appearing in 1950, these were used mainly by the wealthy for convenience instead of carrying cash or a checkbook (Durkin & Price, 2000, p. 624).
During this time period, homeownership typically required a 20 percent down payment (Melicher & Norton, 2014, 168). Lending institutions were very careful about whom they lent money to, and credit standards were high (Melicher & Norton, 2014, 168). Melicher & Norton (2014) called this the “save now, spend later” philosophy, and it would change in the coming years (p. 168).
Attitudes about spending changed drastically. At this point, more people had access to credit cards because credit card companies stopped limiting their customer base to the wealthy, and began issuing cards to people with moderate to low incomes (Garon, 2012, CNN...