Was the subprime crisis predictable? Some analysts predicted it in 2005 as a continuation of a long boom, during which loans to U.S. households rose sharply. Now the U.S. Federal Reserve (FED), led for over 20 years by Alan Greenspan takes a systematic approach to support the banking crisis stock market (1987, 1998 and 2001) by accommodating rate policies.
These policies have resulted in swelling of the U.S. money supply, and hence the abundance of global liquidity: hence increased competition among banks, which offered loans at interest rates better than the others, which we shall see, was one factor behind the subprime crisis.
Thus, between 1997 and 2006, debt flows (i.e., the total amount of loans) of U.S. households rose 14% while loans of poor quality (subprime) have increased, loans without verification of income have almost doubled over the same period, reaching 46% of total loans in 2006.
In these circumstances, an adjustment was inevitable. The first signs appeared by the end of 2006, plus the decline in U.S. growth and the first payment problems on subprime loans, causing a fall in U.S. house prices, a harbinger of the crisis.
The Fed formulates the rates for three main reasons:
-expansion of real estate was one of the engines of U.S. growth, it should not break;
-Household borrowers should keep their jobs, in order to continue to repay their loans;
-the level of inflation, measured by the rate of growth of general price level (it was then 2.5 - 3%, which is tolerable), but the Fed did not take into account increases in real estate and stock market.
So the Fed had to resolve this dilemma: either inject liquidity and lower rates of intervention to limit the impact of lower real estate and stock prices, but with the main drawback of continuing the policy of Mr. Greenspan (who encouraged speculators, with its risk of bubbles) or be firm on the inflationary risk, but then cause a "credit crush."
The Federal Reserve decided, as we shall see, on several consecutive drops to a spectacular total of 1.25 basis point (5.25% to 4%).
After the bursting of the bubble economy in 2001, many people have wondered, since 2003, the possible existence of a speculative bubble in the U.S. housing market.
This period appears to be unique: there is a rising unemployment rate in the United States, coupled with a decline in purchasing power (see Figure 1) in households, but the evolution of these two factors do not appear to influence housing demand, which is directly correlated to it.
The main reason is the economic situation: the particularly advantageous rate policy practiced by the U.S. Federal Reserve allows any type of household to borrow at favorable rates.The determinants of supply and demand in the housing market help explain the trend in prices: we offer here an analysis.
The supply of new homes increased significantly between 1991 and 2005 at a rate of 4.7% per year. (see Figure 2) 2001 experienced a record in terms of construction, with nearly 1.27 million new housing - a growth rate of 51% in just 10 years.
In the same period, the vacancy rate (reported in occupied housing units available) are increasing steadily, reaching nearly 11% in 2001. The supply of housing increases, therefore, however not always in tandem to the market dynamics, therefore increase the number of empty homes on the market.
At the same time, in fact, the number of transactions on the real estate market is growing only slightly in value, so we see here a gap between supply and demand.This is in parallel with the evolution of prices, which we will detail now.
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