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U.S. Real Estate Bubble Source: Wikipedia Timeline • 1991–1997: Flat housing prices • 1995–2001: Dot-com bubble • 1998: Inflation-adjusted home price appreciati on exceeds 10%/year in most West Coast metr opolitan areas • March 10, 2000: Dot-com bubble collapse. NA SDAQ Composite index peaked Timeline • 2000–2003: Early 2000s recession. • 2001–2005: United States housing – 2001: US Federal Reserve lowers Federal funds rate 11 times, from 6.5% to 1.75%. – 2002: Annual home price appreciation of 10% or m ore in California, Florida, and most Northeastern sta tes. – 2004: U.S. homeownership rate peaked with an all ti me high of 69.2 percent. – 2004–2005: Arizona, California, Florida, Hawaii, and Nevada record price increases in excess of 25% per year. Timeline • 2005–ongoing: United States housing market correctio n ("bubble bursting") – 2005: Boom ended August 2005. The booming hou sing market halted abruptly for many parts of the U .S. in late summer of 2005. – 2006: Continued market slowdown. Prices are flat, h ome sales fall, resulting in inventory buildup. U.S. H ome Construction Index is down over 40% as of mi d-August 2006 compared to a year earlier. Timeline • 2007: Home sales continue to fall. – The plunge in existing-home sales is the steepest si nce 1989. – The subprime mortgage industry collapses, and a s urge of foreclosure activity (twice as bad as 2006) a nd rising interest rates threaten to depress prices fu rther as problems in the subprime markets spread t o the near-prime and prime mortgage markets. • 2008: Home sales continue to fall. Fears of a U.S. reces sion. Global stock market corrections and volatility. 300 250 Phoenix - AZ PHXR Los Angeles LXXR San Diego SDXR 200 San Francisco SFXR Denver DNXR Washington WDXR Miami MIXR Tampa - FL TPXR 150 Atlanta - GA ATXR Chicago CHXR Boston BOXR Detroit - MI DEXR 100 50 March 1997 July 1998 October 1995 April 2001 December 1999 January 2004 May 2005 October 2006 September 2002 300 250 Minneapolis - MN MNXR Charlotte - NC CRXR 200 Las Vegas LVXR New York NYXR Cleveland - OH CEXR Portland - OR POXR Dallas - TX DAXR 150 Seattle - WA SEXR Composite CSXR Composite-20 SPCS20R 100 50 March 1997 July 1998 October 1995 April 2001 December 1999 January 2004May 2005October 2006 September 2002 Subprime Mortgage Crisis • Subprime lending – The practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history or the inab ility to prove that they have enough income to support the monthly payment on the loan for w hich they are applying. – The word ‘subprime’ refers to the credit-worthin ess of the borrower (being less than ideal) and does not refer to the interest rate of the loan. – (‘Alt A’ is bewteen subprime and prime in terms of risk and thus interest rate.) Subprime Mortgage Crisis • The share of subprime mortgages to total originatio ns increased from 9% in 1996, to 20% in 2006. • Loan incentives including "interest only" repayment t erms and low initial teaser rates (which later reset to higher, floating rates) encouraged borrowers to assu me unaffordable mortgages believing they would be able to refinance at more favorable terms later. • Refinancing was possible while U.S. housing prices c ontinued to increase during the 1996-2006 period. H owever, once housing prices started to drop modera tely in 2006-2007 in many parts of the U.S., refinanci ng became more difficult. Subprime Mortgage Crisis • Defaults and foreclosure activity increased dramatica lly. By October 2007, 16% of subprime loans with adj ustable rate mortgages (ARM) were 90 days delinqu ent or in foreclosure proceedings, roughly triple the rate of 2005. • By January of 2008, this number increased to 21%. • During 2007, nearly 1.3 million U.S. housing properti es were subject to foreclosure activity, up 79% versu s 2006. • As of December 22, 2007, a leading business periodi cal estimated subprime defaults would reach a level between U.S. $200-300 billion. Mortgage Walk Out • Over the past few years – until spring 2007 -, banks were willing to approve mortgage l oans with small or even zero downpayment. • Interest-only loans also prevented buyers fr om building equity in their homes. • This little or even zero equity lead people t o default their mortgage loans when house price fell below their equity in their houses, leading to more foreclosures. Bob Shiller on YouTube. • Click Here!
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