US Housing Bubble
US has been the engine of the world economic growth for years now. Especially the last 6 years. What was it doing to create such huge demand to drive the world economy? Basically what was the engine for the US economy?
As we are seeing now the engine was the US housing market. Since the mid nineties lot of production and jobs have been outsourced to China and India. I am no economist but I know that in business you have to produce to sell and make money. The money that you make can be used to sustain your life style (buying a house, car, pay bills etc). Now when you stop producing. You have nothing to sell. How do you then sustain yourself?
If you are an economy as big and as reputed as US. You can sustain yourself on the reputation. Say for example the guy with the biggest house in your neighbourhood asks you to invest in his house. Promising you high returns on the investment. For your satisfaction this guy even asks the experts of the trade to certify (the rating agencies like S&P, Merrill Lynch) that this investment is gold. Unless you are a hard-core investor who sees before he leaps. This offer is too good to refuse.
Since the US was not making money the way it use to i.e. by manufacturing. It needed other ways to do it… In come the bubbles. First came the tech bubble. Where investors in US and all over the world were made to believe that a website can in future generate revenues in billions of dollars. Millions and billions of dollars were poured into so called ideas… or start-ups. We all know what happened to them and the subsequent fallout on the tech industry.
This bubble burst in 2001. From the rubbles of the tech crash rose the Housing bubble. The US banks lending rates were very low during this time. So they started giving out loans. Loans to buy houses. Since the demand wasn’t that great. They started giving loans to people who otherwise wouldn’t have qualified for one. These people had bad credit history and wouldn’t have qualified for a car loan in normal circumstances leave alone a home loan. The lenders knew this the banks knew this. But the investor’s sitting in Europe, Asia did not.
Now when people had access to such easy loans. Everyone wanted to join the party. This fuelled one of the biggest price increases in the US housing history. As the prices rose more people took loans of bigger amount thinking that the price of the property will continue to rise forever and the interest rates will fall further.
But around 2005-2006 prices started to come down. And interest rates went up. People suddenly realised that they can’t afford the loan repayments. Foreclosures skyrocketed. Lending companies started folding up.
A booming housing market creates demand for so many other commodities.. Furniture, retails goods, electronic goods… etc. Basically a house boom creates enough demand to drive the whole economy.
But where did the US banks get this money from to lend in the first place. Call it financial wizardry but these loans were packaged as CDO’S (collateralized debt obligations) and sold all over the world as AAA investment grade investments by US banks and financial institutions. AAA means assured returns on your investment. But how long can you call a bluff for. When the news of the foreclosures stated hitting the markets. The AAA ratings were downgrade to CCC, which means not good for investing.
What we are now seeing is a slow walk of the US economy towards a major crash. If only they can pull out an ace from somewhere and start another bubble. USA is heading for a major economic correction.
As we are seeing now the engine was the US housing market. Since the mid nineties lot of production and jobs have been outsourced to China and India. I am no economist but I know that in business you have to produce to sell and make money. The money that you make can be used to sustain your life style (buying a house, car, pay bills etc). Now when you stop producing. You have nothing to sell. How do you then sustain yourself?
If you are an economy as big and as reputed as US. You can sustain yourself on the reputation. Say for example the guy with the biggest house in your neighbourhood asks you to invest in his house. Promising you high returns on the investment. For your satisfaction this guy even asks the experts of the trade to certify (the rating agencies like S&P, Merrill Lynch) that this investment is gold. Unless you are a hard-core investor who sees before he leaps. This offer is too good to refuse.
Since the US was not making money the way it use to i.e. by manufacturing. It needed other ways to do it… In come the bubbles. First came the tech bubble. Where investors in US and all over the world were made to believe that a website can in future generate revenues in billions of dollars. Millions and billions of dollars were poured into so called ideas… or start-ups. We all know what happened to them and the subsequent fallout on the tech industry.
This bubble burst in 2001. From the rubbles of the tech crash rose the Housing bubble. The US banks lending rates were very low during this time. So they started giving out loans. Loans to buy houses. Since the demand wasn’t that great. They started giving loans to people who otherwise wouldn’t have qualified for one. These people had bad credit history and wouldn’t have qualified for a car loan in normal circumstances leave alone a home loan. The lenders knew this the banks knew this. But the investor’s sitting in Europe, Asia did not.
Now when people had access to such easy loans. Everyone wanted to join the party. This fuelled one of the biggest price increases in the US housing history. As the prices rose more people took loans of bigger amount thinking that the price of the property will continue to rise forever and the interest rates will fall further.
But around 2005-2006 prices started to come down. And interest rates went up. People suddenly realised that they can’t afford the loan repayments. Foreclosures skyrocketed. Lending companies started folding up.
A booming housing market creates demand for so many other commodities.. Furniture, retails goods, electronic goods… etc. Basically a house boom creates enough demand to drive the whole economy.
But where did the US banks get this money from to lend in the first place. Call it financial wizardry but these loans were packaged as CDO’S (collateralized debt obligations) and sold all over the world as AAA investment grade investments by US banks and financial institutions. AAA means assured returns on your investment. But how long can you call a bluff for. When the news of the foreclosures stated hitting the markets. The AAA ratings were downgrade to CCC, which means not good for investing.
What we are now seeing is a slow walk of the US economy towards a major crash. If only they can pull out an ace from somewhere and start another bubble. USA is heading for a major economic correction.
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