U.S.

Real Estate Bubble

Source: Wikipedia
 Timeline
• 1991–1997: Flat housing prices
• 1995–2001: Dot-com bubble
• 1998: Inflation-adjusted home price appreciati
on exceeds 10%/year in most West Coast metr
opolitan areas
• March 10, 2000: Dot-com bubble collapse. NA
SDAQ Composite index peaked
 Timeline
• 2000–2003: Early 2000s recession.
• 2001–2005: United States housing
– 2001: US Federal Reserve lowers Federal funds rate
11 times, from 6.5% to 1.75%.
– 2002: Annual home price appreciation of 10% or m
ore in California, Florida, and most Northeastern sta
tes.
– 2004: U.S. homeownership rate peaked with an all ti
me high of 69.2 percent.
– 2004–2005: Arizona, California, Florida, Hawaii, and
Nevada record price increases in excess of 25% per
year.
 Timeline
• 2005–ongoing: United States housing market correctio
n ("bubble bursting")
– 2005: Boom ended August 2005. The booming hou
sing market halted abruptly for many parts of the
U.S. in late summer of 2005.
– 2006: Continued market slowdown. Prices are flat, h
ome sales fall, resulting in inventory buildup. U.S. H
ome Construction Index is down over 40% as of mi
d-August 2006 compared to a year earlier.
 Timeline
• 2007: Home sales continue to fall.
– The plunge in existing-home sales is the steepest si
nce 1989.
– The subprime mortgage industry collapses, and a su
rge of foreclosure activity (twice as bad as 2006) an
d rising interest rates threaten to depress prices furt
her as problems in the subprime markets spread to
the near-prime and prime mortgage markets.
• 2008: Home sales continue to fall. Fears of a U.S. reces
sion. Global stock market corrections and volatility.
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Phoenix - AZ PHXR
Los Angeles LXXR
200 San Diego SDXR
San Francisco SFXR
Denver DNXR
Washington WDXR
Miami MIXR
Tampa - FL TPXR
150 Atlanta - GA ATXR
Chicago CHXR
Boston BOXR
Detroit - MI DEXR

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50
October 1995 July 1998 April 2001 January 2004 October 2006
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Minneapolis - MN MNXR
200 Charlotte - NC CRXR
Las Vegas LVXR
New York NYXR
Cleveland - OH CEXR
Portland - OR POXR
Dallas - TX DAXR
150 Seattle - WA SEXR
Composite CSXR
Composite-20 SPCS20R

100

50
October 1995 July 1998 April 2001 January 2004 October 2006
 Subprime Mortgage Crisis
• Subprime lending
– The practice of making loans to borrowers who do n
ot qualify for market interest rates because of proble
ms with their credit history or the inability to prove t
hat they have enough income to support the monthl
y payment on the loan for which they are applying.
– The word ‘subprime’ refers to the credit-worthiness
of the borrower (being less than ideal) and does not
refer to the interest rate of the loan.
– (‘Alt A’ is bewteen subprime and prime in terms of ri
sk and thus interest rate.)
 Subprime Mortgage Crisis
• The share of subprime mortgages to total originatio
ns increased from 9% in 1996, to 20% in 2006.
• Loan incentives including "interest only" repayment t
erms and low initial teaser rates (which later reset to
higher, floating rates) encouraged borrowers to assu
me unaffordable mortgages believing they would be
able to refinance at more favorable terms later.
• Refinancing was possible while U.S. housing prices c
ontinued to increase during the 1996-2006 period. H
owever, once housing prices started to drop modera
tely in 2006-2007 in many parts of the U.S., refinanci
ng became more difficult.
 Subprime Mortgage Crisis
• Defaults and foreclosure activity increased dramatical
ly. By October 2007, 16% of subprime loans with adj
ustable rate mortgages (ARM) were 90 days delinqu
ent or in foreclosure proceedings, roughly triple the
rate of 2005.
• By January of 2008, this number increased to 21%.
• During 2007, nearly 1.3 million U.S. housing properti
es were subject to foreclosure activity, up 79% versu
s 2006.
• As of December 22, 2007, a leading business periodi
cal estimated subprime defaults would reach a level
between U.S. $200-300 billion.
 Mortgage Walk Out
• Over the past few years – until spring 2007
-, banks were willing to approve mortgage l
oans with small or even zero downpayment.
• Interest-only loans also prevented buyers fr
om building equity in their homes.
• This little or even zero equity lead people to
default their mortgage loans when house pr
ice fell below their equity in their houses, le
ading to more foreclosures.
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