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Housing Bubble

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					Housing/Real Estate Bubble
  It is characterized by rapid increases in
   the price of homes until they reach
   unsustainable levels relative to
   incomes and other economic elements.
  Bubbles are generally considered to have a
   negative impact on the economy because they
   tend to cause misallocation of resources.



    GRANITE FALLS HIGH SCHOOL
GRANITE FALLS HIGH SCHOOL
                       Timeline
 2001: US Federal Reserve lowers Federal funds rate (interest
  rates) 11 times, from 6.5% to 1.75%.
 2002: Annual home price appreciation of 10% or more in
  California, Florida, and most Northeastern states.
 2004: U.S. homeownership rate peaked with an all time high of
  69.2 percent.
 2004–2005: Arizona, California, Florida, Hawaii, and Nevada
  record price increases in excess of 25% per year.
 2005: Boom ended August 2005. The booming housing market
  halted abruptly for many parts of the U.S. in late summer of
  2005.
 2006: Continued market slowdown. Prices are flat, home sales
  fall, resulting in inventory buildup. U.S. Home Construction
  Index is down over 40% as of mid-August 2006 compared to a
  year earlier.
 2007: U.S. Treasury secretary calling the "the housing decline ...
  the most significant risk to our economy."

        GRANITE FALLS HIGH SCHOOL
         Mortgage Crisis
 Banks / mortgage companies gave new
  and existing homeowners loans called
  “Adjustable Rate Mortgages” or ARMS.
 People took out the equity in the houses.
 When the interest rates went up, so did
  people’s house payment.
 Bubble was bursting and homes were
  loosing money.
     GRANITE FALLS HIGH SCHOOL
            Mortgage Crisis
   People were no “upside-down” in home.
   Homes worth less than what they owe.
   Mortgage payments go up – can’t afford.
   Home goes into foreclosure.
   Also, many financial institutions were doing
    “subprime” lending:
    – Less room for financial difficulties of the borrower.
    – Often leads to late payments and defaults.
    – Given to people who did not meet traditional
      loan qualifications – poor credit, no down
      payment – high risk.
      GRANITE FALLS HIGH SCHOOL
        Lehman Brothers
 Founded in 1850
 Global financial-services firm.
 The firm does business in investment
  banking and investment management.
 The firm's worldwide headquarters are in
  New York City, offices located throughout
  the world.
 More than 26,000 employees.
 On September 15, 2008, it filed for Chapter 11
  bankruptcy protection listing bank debt of
  $613 billion.
    GRANITE FALLS HIGH SCHOOL
             Bear Stearns
 One of the largest investment banks and
  brokerages firms in the country.
 March 2008 was bought by JPMorgan Chase with
  help from the US Government (Federal Reserve
  Bank of New York).
 Bear Stearns was given an emergency loan to in
  order to prevent the potential market crash.
 Government helped Bear Stearns signed a merger
  agreement with JP Morgan Chase for $2 a share.
 A staggering loss as its stock had once traded
  at $172 a share in January 2007.
     GRANITE FALLS HIGH SCHOOL
                     Bankruptcy
 A legally declared inability of an individual or
  organization to pay their creditors.
 Bankruptcy is usually voluntary and initiated by the
  individual or organization.
 There are six types of bankruptcy under the U.S.
  Bankruptcy Code:
   –   Chapter 7: Basic liquidation for individuals and businesses.
   –   Chapter 9: Municipal bankruptcy.
   –   Chapter 11: Reorganization - used primarily by business.
   –   Chapter 12: Rehabilitation for farmers and fishermen.
   –   Chapter 13: Payment plan for individuals with a source of income.
   –   Chapter 15: Ancillary and other international cases.


         GRANITE FALLS HIGH SCHOOL
                    Stocks
 The stock market is the core of America’s
  economic system.
   – Stock is a share of ownership in the assets
     and earnings of a company.
   – Stock market is a general term used
     to describe all transactions involving the
     buying and selling of stocks and bonds
     issued by a company.



      GRANITE FALLS HIGH SCHOOL
            Buying Stocks
 When a company would like to grow, it
  issues stocks to raise funds and pay for
  ongoing business activities
 It is popular because:
  – The company does not have to repay the money.
  – Paying dividends is optional.
  – Dividends are distributions of earnings paid to
    stockholders.


     GRANITE FALLS HIGH SCHOOL
         Buying Stocks
 On average, stocks have a high rate
  of return, sometimes up to 12%.
 Return means the increase or
  decrease in the original purchase
  price of stock.
 Higher rate of return = greater risk.
 Stocks provide portfolio
  diversification
    GRANITE FALLS HIGH SCHOOL
        What is a Portfolio?
 Money invested in a variety of
  investment tools.
 People investment for lots of reasons . . .
  – Retirement (401k), wealth, income and fun.
 Holding a portfolio is part of an investment
  strategy called diversification.
 By owning several assets (diverse) certain
  types of risk can be reduced.
  – Stocks, bonds, warrants, gold certificates, real estate,
    or any other item that is expected to retain its value.
      GRANITE FALLS HIGH SCHOOL
  Broker/Brokerage Firms
 A stockbroker is a qualified and
  regulated professional who buys
  and sells shares and other securities
  on behalf of investors.
 A brokerage or a brokerage firm is a
  business that acts as a broker.

    GRANITE FALLS HIGH SCHOOL
            Wall Street
 Wall Street is a street in lower
  Manhattan, NY.
 Wall Street was the first permanent
  home of the New York Stock Exchange.
 Major part of New York’s financial
  district.
 Metaphor often used when referring to
  the stock markets or financial markets.

     GRANITE FALLS HIGH SCHOOL
GRANITE FALLS HIGH SCHOOL
         Stock Exchanges
 Stock exchange is a corporation or
  organization which provides "trading"
  facilities for a stock brokers and traders, to
  trade stocks and other securities.
  – New York Stock Exchange
  – National Association of Security Dealers
    Automated Quotations (NASDAQ)
  – Bombay Stock Exchange


     GRANITE FALLS HIGH SCHOOL
        Stock Market Index
 Dow Jones Industrial Average (“DOW”)
  – Lists the 30 most widely held public companies in the United
    States. Such as, McDonalds, Wal-Mart, Coca-Cola, Exxon-
    Mobile, Chevron.
 Standard and Poor’s 500 Composite Index
  – Covers market activity for 500 stocks.
  – More accurate than DOW because it evaluates a
    greater variety of stock.
 NASDAQ Composite
  – Monitors fast moving technology companies.



      GRANITE FALLS HIGH SCHOOL
                   Stop Gaps
 Federal Deposit Insurance Corporation
  – Provides deposit insurance which guarantees the safety of
    checking and savings deposits in member banks, up to
    $100,000 per depositor.
  – The vast number of bank failures in the Great Depression
    spurred the US government to create an institution to
    guarantee deposits held by commercial banks.
 Stocks not covered!
  – Securities Investor Protection Corporation (SIPC) -- a
    federally mandated corporation that protects investors from
    harm if a broker/dealer defaults.
  – SIPC provides insurance coverage up to $500,000 of the
    customer's net equity balance.
      GRANITE FALLS HIGH SCHOOL

				
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