The Housing Market Crash of 2007

Introduction 

The housing market crash of 2007 was the primary predecessor to USA’s worst financial crisis since the Great Depression. Home ownership is an integral part of the American dream. Before the crisis, a combination of factors made homes affordable to many Americans and the real estate industry suddenly become the economy’s driver. However, the fast expansion of the home market was a ticking time bomb as the country could not sustain the industry’s growth in the long-run. All the same, the housing market crash in 2007 sent shock waves throughout the country disrupting the operations of the real estate industry ( Yilmazer, Babiarz, & Liu, 2015) . The 2008/2009 global financial crisis exacerbated the problem by slowing down the home market recovery process, but the situation has significantly improved over the last ten years. However, some uncertainties continue to persist about the stability of the home market until today. Analyzing the causes of the home market crash, recovery journey, and real estate projections will help to determine the current status of the home market today. 

Causes of the Housing Market Crash 

Several factors were responsible for the housing market crash. Foremost was imprudent lending by banks to home buyers throughout the country. Over the years, there have been concerted efforts by the USA government to raise the rates of homeownership for all groups in the society in pursuit of social justice (Farmer, 2015). The government interfered with the mortgage market through the provision of tax subsidies to home owners and encouraging banks to extend credit to people to help them achieve their dream. As a result, banks relaxed their lending rules and issued risky loans to people without substantive evaluation of their credit histories. Besides, banks participated in loan securitization to increase their market share, and in turn adapted high market risk. When the market collapsed, many people defaulted on their loans as they were unable to pay their interest rates and the market value of houses collapsed. 

Other than the above, there was also the price speculations in the home market. Although banks are conservative institutions, they willingly relaxed their credit conditions without worrying about the possible impact of their decisions on their performance. The banks decisions were fueled by the irrational exuberance that there was no imminent threat to the high market prices of houses in the market (Farmer, 2015). Undoubtedly, the expectations led to the growth of the housing bubble until its unprecedented burst in 2007. Since the crisis, many questions have been raised on the banks’ incapability to accurately read the market signs and foresee the housing bubble burst. 

Monetary policies were the third contributor to the home market crash. The Federal government adjusted interest rates downwards after the 2001 stock market crash in the country to fast-track the economic recovery process. Finance costs declined and consumers and small businesses could afford to take loans. Besides, the monetary policies facilitated the creation of adjustable rate mortgages (ARMs) giving home buyers flexibility to pay back their loans. Construction companies took advantage of the low cost financing and growing demand for new houses to build new homes ( Conefrey, & Whelan, 2013) . Therefore, the monetary policy changes in 2007 not only raised the interest rates leading to mortgage foreclosure, but also affected the ongoing construction work in the real estate industry. The collapse of the 2007 home market placed the whole country in turmoil and efforts to revive the sector began immediately. 

Effects of the Home Market Crash on Real Estate Industry 

The negative impact of the home market crash on the real estate industry cannot be underestimated. Massive loss of jobs among real estate brokers was the immediate impact of the crisis. Before the bubble, the real estate industry employed many brokers to assist in the completion of clients’ sales contracts offering them consistent and high income. After the bubble burst, the real estate companies laid off brokers in their attempt to reduce operational costs and cope with the declining sources of revenue in the market. Employees in other industries like manufacturing and construction were also affected by the crash of the home market sector, which was their primary driver of growth. Foreclosure became the fate for some of the real estate brokers’, who lost their jobs and were unable to make the necessary payments ( Brown, & Matsa, 2016). 

Falling demand for new houses after the home market crash resulted in the decline of real estate development projects in the country. During the bubble, real estate companies earned high revenues due to the high demand for houses among the consumers. Notably the easy access to mortgage loans encouraged people to purchase big homes or more than one property for different uses, thus high commission rate and fees were paid to real estate firms (Farmer, 2015). Therefore, these companies had substantial investment funds that were combined with bank loans to carry out new projects. However, the emergence of the bubble adversely affected cash flow to the real estate firms, and they were unable to obtain further assistance from the struggling banks. As a result, the real estate developmental projects came to a sudden halt. For the real estate agents, the setback significantly reduced their chances for securing new employment. 

Another negative impact of the home market crash was the development of lack of the public’s trusts in the real estate industry particularly for the real estate brokers. The real estate agents and brokers were at the forefront of convincing people to purchase homes to live the American dream. When the home market crashed, people demanded explanations from the real estate agents about the happenings. Although the real estate brokers and their employers were expected to have more knowledge about the market, they failed to warn their clients and issue appropriate advice to their clients. Some foreclosed homeowners went to the extent of suing real estate companies and brokers that handled their purchases. Reinstating the public’s trust is a slow process and it could take years to accomplish the objective. However, the real estate brokers are at a disadvantage because they have to wait to develop people’s trust in their operations to get new jobs. 

Recovery of the Home Market 

There has been a slow recovery in the home market over the last ten years. Demand for real estate began in 2012-five years after housing bubble burst in the country. The changes in the real estate sector are evidenced by the increasing median and average sales prices for homes on the country. For example, the median and average costs of homes in December 2012 were $258,300 and $ 299, 2000 respectively. The median and average costs of the same properties rose to $302,400 and $363,400 respectively in November 2018. As a result, the construction of housing units has increased and people are more focused on becoming home owners (Gov, 2019). However, the biggest question is whether the latest development in the real estate sector is sustainable in the long-haul, thus the need to examine factors driving the real estate growth in the country today. 

Recovery of the home market is directly linked to the country’s economic recovery after the 2008/2009 crisis. The collapse of the country’s financial system was the beginning of a recession in the country that resulted in loss of jobs, lower property value, and high uncertainty rates in the economy. The Federal government reacted through monetary and fiscal policies that helped to revamp economic growth in the nation. Subsequently, the GDP growth rate has increased from -2.776% in 2009 to +2.273% in 2017 (World Bank Group, 2019). The favorable economic growth is attributable to increased business investment in all the sectors including the real estate industry. As a result of the economic growth, households have more income for investment in the sector resulting in high demand for housing units. 

The declining unemployment rate is arguably the biggest drive for the renewed demand for houses after the home market crash. Unemployment rate following the home market crash and economic crisis reached a high of 10.2% in 2009, thus the demand for real estate remained predominantly low. However, the situation has changed and the country’s unemployment currently stands at 4% (BLS, 2019). As a result, consumers have higher amounts of disposable income today compared to ten years ago, thus they can afford to buy homes. The situation explains the rising demands for real estate in the country that is opening new opportunities for real estate brokers. 

Undoubtedly, the thriving real estate industry is proof of the reinstated public trust in the activities of the real estate brokers. Real estate companies have adopted transparent business practices that keep customers informed about various developments likely to affect their purchase decisions. Besides, many real estate brokers have learned critical lessons from the home market crash and use their newly acquired experience and knowledge to guide clients to make the right choices. 

Additionally, the rising house prices are attributable to the shortage of homes in the country. Investors are still wary about the future of the real estate sector after the home market crash, thus investment in the sector has been slow. Therefore, the supply of housing units in the country is less than the demand forcing people to pay more for homes. For the real estate brokers, the development helps them to earn high commission rates. However, if supply of homes is not increased, the absorption of new brokers into the industry will slow. Fortunately, the suppliers have begun building new houses to capitalize on the growing market ( Brown, & Matsa, 2016) . However, there are fears that the rising housing costs in USA is a sign of a new home market bubble that will eventually burst and cause the same negative impacts on the industry. 

Future of US Real Estate Industry 

Forecasts on the future of the real estate industry show that there is no impeding crisis in the home market in the near future. The predicted macro-economic indicators including lower unemployment rate and higher GDP growth are favorable and foretell improvements in the real estate industry. As more people get into steady employment, they will have an opportunity to fulfil their home ownership aspirations. The number of baby boomers in the labor market is expected to remain high, and this demographic make up the largest group of current and aspiring home owners in the country. Although the anticipated increase in the Federal interest rate may be classified as a negative impact on real estate growth, the decision will actually improve people’s confidence by proving that the industry’s growth is not driven by leverage. Therefore, real estate companies will need to hire more brokers to provide services for the expanding market. 

Additionally, the Federal government in collaboration with other stakeholders is expected to continue creating new rules to regulate the activities of the real estate industry. Home owners were the biggest losers in the 2007 home market crash as they lost their hard earned money and investments within a span of few weeks. Protecting consumers from manipulation by players in the retail industry is a priority for the government ( Scatigna, Szemere, & Tsatsaronis, 2014) . Undoubtedly, the introduction of the strict regulatory standards for banks will prevent mortgage securitization and subprime lending in the market, thus the risk of loan defaults will significantly reduce. The Dodd-Frank law provides a more comprehensive guideline on consumer protection law that should be followed to avert future economic crisis in the country. Policy development is a continuous process and more regulatory changes into the real industry are expected in future. Adherence to these laws is mandatory for real estate brokers and their employers, the changes will set the tone for future developments in the sector. 

Construction of new housing units will offset the current mismatch between the demand and supply forces in the market. Before the collapse of the home market in 2007, there were many signs of the impeding economic problem. The government ignored to overtly positive speculations about the housing market that led many people to invest their funds in the industry, thus many were unprepared for the inevitable crash. Moreover, the government’s interference with the industry encouraged financial institutions to make wrong decisions that continue to haunt the country until today (Farmer, 2015). Therefore, the fact that the real estate is industry is reacting to the house shortage problem shows the state’s commitment to prevent another housing market collapse. If the unbalanced demand and supply forces go unchecked, the house prices will rise at a fast rate leading to a bubble, which will collapse with time. Early deviation of uncontrolled price hikes in the real estate market is key to avoiding another housing market crash. 

Conclusion 

From the analysis above, there is no doubt that the housing market is safe and secure from future crash. The 2007 housing market crash had significant negative impact in the country including loss of employment, foreclosure of homes, economic crisis, and loss of trust in the real estate industry. Arguably, the economic crash was the most devastating consequence of the crisis because it affected other industries and spilled out into other countries around the world. Ironically, the causes of the housing market crash including poor lending standards, price speculations, and monetary policies were implemented to promote social justice in the community. Effects of the crash on the real estate industry were loss of jobs, lower housing demands, and destruction of people’s trust in the sector. Fortunately, GDP growth, lower unemployment rates, and trustworthy operations have led to the recovery of the real estate industry and continue to support its progress. All in all, the future of the real estate industry and its workers is secure as there are enough regulations controlling operations, macroeconomic indicators are favorable. Moreover, efforts are underway to create price equilibrium in the market by correcting the mismatch between the demand and supply forces in the market. Therefore, the rising housing prices are not due to a housing bubble, but because of real development in the USA housing market. Real estate brokers should be ready to take advantage of the strongest real estate market in the country’s history. 

References 

BLS. (2019). THE EMPLOYMENT SITUATION — JANUARY 2019. Retrieved from https://www.bls.gov/news.release/pdf/empsit.pdf 

Brown, J., & Matsa, D. A. (2016).  Locked in by leverage: Job search during the housing crisis  (No. w22929). National Bureau of Economic Research. 

Conefrey, T., & Whelan, K. (2013). Supply, demand and prices in the US housing market. 

Farmer, R. E. (2015). The stock market crash really did cause the great recession.  Oxford Bulletin of Economics and Statistics ,  77 (5), 617-633. 

Gov. (2019). Median and Average Sales Prices of New Homes Sold in United States. Retrieved from https://www.census.gov/construction/nrs/pdf/uspricemon.pdf 

Liu, C. H., Nowak, A., & Rosenthal, S. S. (2016). Housing price bubbles, new supply, and within-city dynamics.  Journal of Urban Economics ,  96 , 55-72. 

O'Brien, B. (2017). Cautious Optimism. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/realestate/reflexions/lu_2017-real-estate-outlook-united-states.pdf 

Scatigna, M., Szemere, R., & Tsatsaronis, K. (2014). Residential property price statistics across the globe. 

World Bank Group. (2019). GDP Growth. Retrieved from https://data.worldbank.org/indicator/ny.gdp.mktp.kd.zg?locations=u 

Yilmazer, T., Babiarz, P., & Liu, F. (2015). The impact of diminished housing wealth on health in the United States: Evidence from the Great Recession.  Social science & medicine ,  130 , 234-241.