The Housing Bubble: Issues in Housing

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The video, “The Housing Bubble” first starts by discussing all the issues that happened when Alan Greenspan changed interest rates in 2000. Taking interest rates down from 6.5% in May of 200 to 1% in June of 2003 caused mortgage rates to drop severely and house prices to increase drastically. To fix what was happening in the economy, Alan Greenspan tried to push money into the banks between 2001 and 2005 by printing 2 trillion new dollars. All this caused housing to be inflated giving people’s houses a “phony” net worth. Because of this, people thought their homes were worth way more than they actually were and people were taking out mortgages however when housing prices started to come back down, the net worth of the house was gone but they still had a very expensive mortgage. People were taking out home equity loans which enabled them to spend money they would one day get for selling their house because the government told them their house prices would never fall but like all prices, interest rates are determined by supply and demand. This caused everyone to borrow money from banks and no one was saving it so the problem that there was too much consumption and borrowing and not enough production and savings.

Next, downpayments and home ownership for low income people is discussed. People were wanting to allow low income people to own homes because they thought that owning a homme would encourage savings so Goerge W. Bush encouraged Congress to allow the Federal Home Administration to permit 0% downpayment loans to low income Americans. What he and other did not realize is that saving money allows for homeownership and homeownership does not encourage savings. If you are given something without saving up and putting in the work, what makes you feel like you would ever have to do that to get something you want. You should have to save up for a home and be able to pay the downpayment instead of being given a home. This whole idea was made because they thought that this would increase savings rates however this was not the case. If the homeowner who paid no downpayment could not upkeep the home, they could just give up and walk away with no consequences because there was no payment needed to be made on it. Going back to low income Americans paying low or no downpayment at all, they would buy homes that they could simply not afford. After the temporary period of low payment rates, when the rates rose back up to a normal price, the majority of people could not afford to make these payments and because they put little to nothing down, they would not even try to afford the payments on the house. This forced real estate prices to go down so other people can afford them and the people who do end up buying the home end up having to pay about twice what its worth.

When Fannie Mae and Freddie Mac came into play, they took mortgages that people made and bought them and turned them into mortgage-backed securities called MBS. They would sell those to investors and the investors would buy a share of the pool of income that results from all the mortgage payments those homeowners make each month. This process is called securitization and Fannie and Freddie made this basic approach to getting funding from mortgages. When the bubble came to an end in 2007, all of those assets began to fall in value and the MBS’s fell in value as well. This was because the pool of income they were in was drying up since homeowners could not pay their bills. The banks were also harmed because they held onto the mortgages thinking that it would be profitable for them over time.

Next, the crash of the stock market in the 1930s is discussed. It not only effected the United States but it also effected large financial institutions in Europe and made them crash. Many banks were brought down in the crash including a large Austrian bank called the Credit Anstalt and others in Europe as well. Back in the 1920s, the money supply increased 6 %to 7% and this did not cause inflation but it caused many people to think they were wealthier than they really were. Then the Federal Reserve wanted to keep prices pretty stable rather than fluctuating and because all this money had been printed, the prices were higher than they should have been. Some of these issues actually caused 1920-21 to be worse than the beginning of the Great Depression. When the government stopped printing money in 1929-1930, instead of a short depression, Herbert Hoover raised income taxes from 25% to 62% as well as other taxes.

The overall argument I saw from this video is that we shouldn’t print more money just because we need to pay for stuff and giving things out for free never ends well. When the government tried to take away downpayments on homes for low income Americans, that was a major issue that could have been solved if we had never tried to give people free stuff. It all goes back to having an incentive to do something rather than being given it for free.