2006 New York Housing Market Bubble - Research Paper Example

? 2006 New York Housing Bubble 2006 New York Housing Market Bubble Introduction A housing bubble can be said to be an economic bubble, which occurs in either local or worldwide real estate market. It is characterized by fast rises in the price of real property until untenable levels are approached or reached relating to incomes and other measures of affordability. Subsequently, the rapid increases lead to decreases in home values and mortgage debt charge that exceeds worth of property. Housing bubbles are usually identified after a market correction since house bubbles do not burst the way stock markets do. A housing bubble can occur when there is excess demand in housing with the supply that does not increase. There was a housing market bubble in New York that reached its climax in 2006. The housing bubble was attributed to rise in subprime lending, poor policies, poor taxation, emergence of new lenders, underwriters and mortgage brokers and credit raters. The housing bubble in New York took a period of ten years before it was realized. Because of the housing bubble in New York, the consumers, lenders and the entire economy were affected. The bubble was identified in New York by housing prices rising faster than the consumer prices, which was attributed to the increased demand for houses and a non-increasing supply side in housing (Frank, 2009). Housing Market Bubble and New York City economy in 2006 During a housing boom, there is a substantial rise in real output as investment in houses and their related investments increases. There tends to be more jobs in the housing sector, and the investment gives out more economic output. Of course, the assets for extra housing activity have to be generated from somewhere, which means less activity for the other sectors of economy than it could have otherwise occurred. On bursting of a housing boom, new housing begins to fall, and the process is reversed. Another aspect of house pricing that affect the economy is that of household wealth effect and the related consumption. In times when house price increases, owners of houses for investments become wealthier and in the end increase their consumption spending since consumption is dependent on a person’s wealth. The wealthier an individual becomes, the more he has the willing power to consume and thus, the more he will consume (Frank, 2009). The New York economy experienced changes due to the housing bubble. Before the market bubble came to be realized in the year 2006, the revenues related to real estates had increased tremendously, but with the housing market bubble, the revenues collected in the form of taxes from the real estates decreased drastically. The decrease in tax revenues could be attributed to the weaknesses in carrying out the housing transactions. There was a decrease in the growth of GDP since it grew at a lower level from the previous years. Private investments fell to 3.3% with a considerable increase in all sectors of private investments, but investments in inventories decreased significantly (Wiedemer, 2006). Consumer spending was highly affected by the housing bubble. As the mortgage interest rates rose, the consumption spending was decreased. However, since the interest rates rose slowly and the corresponding wealth effect was not random, the overall effect on the economy was not immediate, but took time before it could be noticed. An attempt to determine the value of houses rated NYC housing value as being 25% above the sustainable level. Usually, the reduced consumer spending may be because of the consumers not having trust in the housing investments, where they experienced a mix up of prices; price increases and price reductions. The consumers felt less wealthy after the bubble burst and they responded by cutting back spending (Wiedemer, 2006). During times of house bubbling, there were an increased number of brokers and underwriters, these made the real estate trade become easier with their role in shortening the transactions between purchasers and sellers of real estate investments. This meant that carrying out of bank transactions had been made easier thus increasing the risk of acquiring a mortgage. Investors faced a lower capital gain after the bubble and as a result, shifted to other forms of investments. Either the shift in asset investment was locally or to another region, which led to the shift of the current account balances. There were those who opted to trade in other assets outside New York, thus decreasing the total output of New York. It goes without saying that; investors would always seek to invest in assets that realize profits. With that notion, most private investors changed the forms of investment from housing to other assets thus reducing total private investments for New York (Andrews, 2009). The current account balance of New York was affected by the house bubbling. Emanating from the bubbling, there was a change in asset investments, which was directed to other regions and not New York. This made investments in New York to decrease, which affected the economy in terms of output. The total output of New York decreased as a consequence of decreased private investments. Since most investors moved out of New York to invest in other regions, the balance of trade between New York and other regions was affected. There was a growth in recent years regarding the imports and exports of New York, but after the housing bubble, the balance between the imports and exports growth was declining drastically (Wiedemer, 2006). During the time of housing booms, the job opportunities were very many because, there were many people being involved in the housing investments, and thus provided more job opportunities. When the housing bubble busted, employment opportunities decreased in New York. This was because of fear in investment, in the housing sector. The decrease in investment, in the housing sector contributed a lot to the decrease in the job opportunities. Initially, there were all sorts of persons and specialists in the housing sector before the bubbling. There were brokerage firms, underwriter firms and mortgage companies, some of which closed after the house bubbling leading to a decrease in job opportunities, in New York (Frank, 2009). After the housing bubble, most industries that supported the housing sector investments ended up closing. For example, most mortgage firms could not continue with their operations as most investors moved out of the investment. When investors discovered that they could not make good profits from the housing investments, the investors chose to leave the investment resulting to the closure of firms that supported the housing sector. The closure of these firms also led to closing of important providers of employment (Schwartz, 2009). The decrease in private investments, decrease in job opportunities and the decrease in tax revenues from the housing sector, led to a decreased output in the New York economy. As a result of this decrease in output, the trade balance went down. The decrease in the real output made New York experience a period of recession. The recession was not a big one as other forces worked towards neutralizing the recession. The decrease of New York also affected the entire output of United States. The output of United States decreased with the decrease of New York’s output (Wiedemer, 2006). Other industries flourished due to the housing bubble. Most investors who lost confidence in the housing sector chose to abandon the house sector investments for other kinds of investments. The movements to other industries made the industries do better than they were doing before the bubble. In addition, heavy investments in other industries made the economy recover from recession in a faster way since the industries counteracted the loss in output from the housing sector (Andrews, 2009). Conclusion Generally, a bubble can have adverse effects on the economy and in more so, if the bubble affects a developing economy, where the sector affected is the main provider of job opportunities or the main export earner. A market bubble can only occur in an economy if the government policies, which are in action do not curb certain aspects in the economy that prevail in the market. The main cause of a market bubble is a lack of balance of supply side and the demand side. Governments should always ensure that they make policies, which are geared towards ensuring that the supply side and the aggregate demand tend to be in balance. References Andrews, E (2009). Busted: Life Inside the Great Mortgage Meltdown. New York: W. W. Norton & Company. Wiedemer, S. J.E (2006). America’s Bubble Economy: Profit when It Pops. New York: John Wiley & Sons Inc. Sowell, T (2009). The Housing Boom and Bust. Denver: Basic Books. Schwartz, H (2009). Subprime Nation: American Power, Global Capital, and the Housing Bubble (Cornell Studies in Money). Boston: Cornell University Press. Frank, B.D (2009). The Rise and Fall of the Bubble Economy. New York: Berrett-Koehler Publishers. . Read More