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The 2008 Housing Crisis: A Brief Overview Of Causes

1119 words - 5 pages

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 by (n.d.) as a “temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices. As with most economic bubbles, it eventually bursts, resulting in a quick decline in prices...if a housing bubble swells to an extremely high level, the aftermath of the burst may set the housing market back years” ( What this means is that people believed home prices would continue to rise, so home buyers sought to buy, while lenders sought to lend, because of a misguided belief that home prices would not drop. Falling home prices caused the housing bubble to burst, which contributed to a housing crisis.
Leading to the bursting of the housing bubble were three major contributors: a cultural change in American society, a push by the federal government to get people to home ownership, and subprime lending by financial institutions. 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.
Cultural Change
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). This gave Americans a way to purchase goods and services immediately, even if they didn’t have the cash on hand. The seven to eight percent savings rate maintained in the United States from the 1960s to the 1980s plummeted to less than two percent, and remained so until the first decade of the 21st century (Melicher & Norton,...

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