The Current Financial Crises
Essay Preview: The Current Financial Crises
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Having discussed the current financial crises in great depth along with research conducting scenarios on what caused the crisis, we have decided to analyze the real estate bubble and why it popped. Real estate was a fantastic investment in the early 2000s, but as many people began to speculate what might happen to the current market, real estate started its downward spiral. There are three main reasons why the real estate bubble with burst. These three reasons include; rising of interest rates, first time home buyers are priced out of the market, and the psychology of the market has changed.
The first reason causing the real estate bubble to burst is the fact that interest rates have risen and are still climbing today. From June 2003 to June 2004, interest rates were at a historic low. This allowed people to buy homes and get loans at such low interest rates that they were buying a home for more than what they could afford. The low interest rates would give a family the opportunity to buy a home that is more expensive than what could be afforded, while still paying a low monthly affordable payment. This led to a major crisis as interest rates began to climb driving home prices up and existing home values down. People who had purchased houses back when interest rates were low could not bring forth the money after the interest rates had risen. This led to a 72% increase in foreclosures.
The inflation of interest rates also affected people who bought adjustable rate mortgages (ARMS). ARMS would give the buyer low interest and low monthly payments for about the first couple of years and then after the rates would jump and the mortgage payments went out the roof. Both scenarios caused a major increase in foreclosures from 2005 onward. Families who had subprime credit ratings were allowed to purchase the homes early in the 2000s for more than what they had to offer. Combined with the ARMS and rising of interest rates, this is one reason why the real estate bubble ill burst systematically causing a United States recession.
Another reason that caused the Real Estate bubble to burst is that first time homebuyers are being pushed from the market. People buy their house for the opportunity to sell it later, and move into a more expensive house. However, home buyers are feeling more and more the effect of market risk. New home prices are dropping while interest rates are rising, making it much more difficult to find buyers in the market.
This connects with management of financial institutions because of the risk factors involved, and with how much of an effect the real estate slump has affected our economy. Market risk is the risk that your financial asset wont have a high resale value, thus making it worth less, and more risky. With values of housing going down as much as 10.5% from 2005-2006, market risk is a key risk factor.
A major cause for the increased