Housing Market Crash Essay

Beginning in 2000, our economy began to see a change in the housing market. The demand for purchasing a home increased causing prices to rise dramatically. Then, in 2007/2008, the housing market crashed. Although many elements were to blame, to prevent another economic disaster, we need to look at all the sources that contributed to housing downturn of 2007¸including, banking loan criteria, greed, and investment institutions. Before the housing crash, prices were climbing fast. Around 2000, the demand for home ownership was high, thus, pushing the prices higher. In order to purchase a home, people need a mortgage from the bank. However, previous to 2000, banks had stricter loan criteria; for instance, you needed a high credit score,

AIG sold insurance for the mortgage back securities, meaning if people were unable to repay the loan, AIG insured that investors would not lose their principle or interest on that loan. On the other hand, investors paid premiums to AIG to protect itself from loss. AIG and other similar companies continued to sell these insurance policies for what was thought to be a safe investment. AIG earned an enormous amount of money on fees and premiums rather than invest in solid investments. “As of the end of 2007, they had grown to roughly $60 trillion in global business.” 1 Since, these insurance policies became a significant portion of their business, when the housing market crashed, people defaulted on their mortgages, bank foreclosures skyrocketed, and the investors wanted to collect on their insurance policies all at once. Now, AIG had to make payments but, nobody was paying them. AIG could not financially honor “more than $440 billion in bonds”2 which lead to the biggest bank failure. Therefore, the United States government had to step forward and institute a bailout

First, the biggest thing we can do is reduce our debt. Credit is misused in this country by individuals causing financial disasters in many households. People need to understand that credit is spending tomorrow’s money today. Many people make the mistake of paying the “minimum payment” on their credit cards, thus, incurring fees and finance charges. What they do not realize is that they are paying more for that item, when they make the minimum payments. As a general rule, individuals should adhere to the 20-10 rule, which tells us we should never borrow more than twenty percent of our annual net income and our payments should not exceed ten percent of our monthly net income. In addition, when you are purchasing a home, the rule of thumb is that your “mortgage payment should not exceed 28% of your gross income”3 and your down payment should be 20% of the purchase price. For example, if your gross pay equals $100,000, the maximum amount should not exceed $28,000 per year and your down payment should be $20,000; the higher the down payment the lower your mortgage