Real Estate and Recession - Research Paper Example

This is what happened in United States before the global financial crisis. The values of houses touched the peaks during the year 2006 which begin to rapidly decline during 2006-2007. Now let us discuss some of the causes which led to the burst of housing bubble. The housing tax policy as discussed in taxpayer relief act of 1997 encouraged people to invest in housing rather than stocks and other types of investments. There were not enough regulations in place to have a proper check and balance on such housing investments.

The use of mandated loans is considered another cause of the burst of housing bubble. Then the federal bank also lowered interest rates while the rise of houses was not uniform in all regions of United States. The Americans used to believe that investing in houses is a secured investment and they even preferred to become owners of their houses. There were many marketing campaigns being run to encourage people to invest in real estate. This encourages more and more people to invest. However, the high values of houses were later followed by decline in prices which busted the bubble.

The housing bubble affected the U.S economy in various ways. Millions of new houses were built and sold. The share prices and revenues of big construction companies reached to the peak and made millions as a result. There was a large increase in mortgage equity withdrawals which usually include loans for home equity and cash out refinancing. The housing bubble led to the recession in United States which was the worst after great depression. Many Americans were forced to migrate from the expensive metropolitan areas due to price variation in different regions on United States.

The subprime mortgage crisis was one of the most important reasons which led to the global financial crisis. This was due to the result of delinquencies and foreclosures in subprime mortgages. Then it was followed by the decline in value of these securities backed by the underlying mortgages. The financial crisis and recession has not ended yet. Financial experts believe that the slow growth will continue till the end of year 2012. The entire world in interconnected and the United States is bound to suffer due to the events and happenings across different countries.

Since the start of financial crisis, the federal government has been taken serious effects to avoid this in future. However, there are few things which need to be emphasized. There must be some lender of the last resort such as International Monetary Fund (IMF) who can come for help whenever needed. Unfortunately, IMF doesn’t have this job role or enough resources to handle such situations. This needs to be raised during the coming IMF meetings. Then there is need of regulations which can protect the organizations from taking excessive risk.

The leverage ratios can also be put in some limit in order to estimate the damage by the shock. The federal bank should put special efforts to control the growing powers of big firms which can even negatively affect the situation. The firms and even government institutions should pay special consideration while extending credit to borrowers. The credit history of prospective buyers needs to be checked before giving them loans. In order to avoid mortgage crisis, Federal Deposition Insurance Corporation (FDIC) came out with loan work out model.

This model was introduced with the