The 2007 Real Estate Market Crash - Research Paper Example

It is connected to many other aspects of the U.S. and world economies. For this reason, an understanding of how the economy works is important to gain a deeper appreciation for the events that have developed. The paper has three parts that answer the questions: "Where are we now", "How did we get here" and "Where are we going" Answering these basic questions would result in a deeper understanding of events, allow an objective analysis of the causes and how these are linked to the effects, and teach important lessons that could be learned to avoid, or at least minimize, similar experiences and mistakes in the future.

The third part is a series of predictions of what would happen, what steps could be taken to minimize the negative effects on the economy, and what lessons could be learned and answers the question "Where are we going" On February 7, 2007, the Senate Banking Committee indicated that nearly 20 percent of sub-prime mortgage loans obtained from 2005-2006 would be foreclosed, threatening over 2.2 million families in the U.S. with losing their homes over the next few years (ABI, 2007, p. 8). Last April 2, 2007, the second largest provider of high-risk, sub-prime mortgages in the U.S., New Century Capital Corporation of Irvine, California, filed for Chapter 11 bankruptcy protection and fired 3,200 employees in the wake of its own "financial missteps" and troubles with the SEC and U.S. Department of Justice over financial statements which failed to accurately account for financial losses the corporation was suffering, as well as mismanagement of the corporation (Gentile, 2007, p. 1).A September 1, 2007 issue of The Economist (2007, p. 59) revealed that despite official reports in the end of July that the U.S. economy was doing well, the truth was much darker than what most people believed: the economy's weakest link, the housing market, was in even worse shape than many realized.

New-home construction plunged in July; the backlog of existing unsold houses rose to a 16-year high; and average house prices in America's ten main cities fell by 4.1% in the year to June. These developments led economists to forecast that the pace of new-home building would fall by a further 30% and average house prices would tumble between 7.5% and 15% by the end of 2008 and by another 15% to 30% in the succeeding years.These news reports can be seen as part of a series of business and financial problems.

Houses were built using borrowed money that could not be repaid by builders because the houses could not be sold. Houses could not be sold because too many were built because borrowing was easy. Since houses could not