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Housing Bubble & Financial Crisis

I am having trouble being objective answering the following questions even after reading the topic twice. I would appreciate help from someone who has a good knowledge of the topic without the personal views I have. The main thing I am looking for is an objective opinion that one single anyone out the way my views do. Questions are below and I attached the Topic just in case.

1. Why did housing prices rise rapidly during 2002-2005? Why did the mortgage default rate increase so sharply during 2006 and 2007 even before the 2008-2009 recession began?

2. What happened to the credit standards (e.g., minimum down payment, mortgage loan relative to the value of the house, and creditworthiness of the borrower) between 1995 and 2005? Why did the credit standards change? How did this influence the housing price bubble and later the default and foreclosure rates?

4. When did mortgage default and housing foreclosure rates begin to rise rapidly? When did the economy go into recession? Was there a causal relationship between the two? Discuss.

6. Some charge that the Crisis of 2008 was caused by the "greed" of Wall Street firms and other bankers. Do you agree with this view? Do you think there was more greed on Wall Street in the first five years of this century than during the 1980s and 1990s? Why or why not?


Solution Preview

1) There are many reasons why housing prices rose rapidly during 2002-2005. They can be explained in very simple terms or very complex terms. The simplest reason is supply vs demand. The demand for housing increased during this time in part due to the fact that lending standards were reduced in such a way that people who wouldn't historically qualify for home loans were now able to qualify. This is more commonly referred to as sub-prime mortgages. Many would argue that this was the catalyst that caused the all the speculation in the housing industry and ultimately led to the financial crisis of 2008. The real catalyst can be traced back a few years earlier to the bursting of the dotcom bubble and then not long after the September 11th terrorist attacks. After these two events the central banks around the United States tried to kick start the economy by lowering lending standards. Once the lending standards were lowered many Americans were now able to qualify for mortgages and thus there was a higher demand for houses; both existing and ...

Solution Summary

Opinion on the relationship between the dotcom bubble, September 11th terrorist attacks, housing bubble, and the 2008 financial crisis.