The financial crisis of 2007 is a cessation which befell the banks before the financial crisis of 2008. The main cause of the crisis was the sub-prime mortgage crisis which has occurred as a result of uncontrolled utilization of derivative. Since the occurrence of the great depression, the United States housing market has significantly impacted the employment levels and economic production. In 2007, the nation suffered a great financial recession. The main cause of this recession was the abounding of the housing bubble a transitory condition which was caused by the unjustified speculation within the housing market resulting to a rapid increase in the prices of the real estate. The effects of the 2007 housing industry crash can be understood well from numerous perspectives (Fitzpatrick &McQuinn, 2007). To comprehend well its impacts on the economy, the following two peer-reviewed about the same issue will be evaluated.
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The first article examines the effect of the 2007 financial crisis on both real prices of houses and the exact interest rates of the mortgages. According to the author, the financial crisis of 2007 generated great shocks to both the mortgage and UK housing markets. The article embraces the dynamic restrictive correlation approach to investigate the effect of the predicament on the restrictive correlation of the interest rates of the mortgage and the house prices. According Bjørnland& Jacobsen (2010), this article serves as a critical concern as any operational variation within the platform association could change the monetary policy efficiency within the housing market.
The article tested the following hypotheses; to begin with, it investigated whether the financial crisis occurred due to permanent variation in the rapport between the prices of real house and exact interest rates. Secondly, the article aimed at determining whether the structural adjustment in the association amidst the real interest and house prices depicted regional variation. GARCH and DCC model were applied in this article. The DCC model adopted utilized the fractional variated data, regulates the structural breaks as well as the sum of the non-interest rate associated house impacting variables.
Fitzpatrick &McQuinn (2007), found that the correlation amidst the mortgage interest and the house prices are highly positive. Though this result is an antagonist to the theoretical anticipations, the same results are evidenced in the literature. The research also found that the structural effect on the conditional relationship was significantly correlated. The effect on Wales and England correlations, in general, was found optimistic. It was found that it improved by a percentage of 6.6 points concerning the three-year immobile interest rate of the mortgage and 6.4 point increase in percentage concerning the standard variable rate. The study also found several weak shreds of evidence suggesting the existence of regional variations about the transmission association to the crisis. However, these results were found to have restricted statistical significance and as a result, the authors concluded that there is no fundamental proof to underpin the regional variation hypothesis concerning the correlation to the crisis. Same results were found in a study by Bjørnland& Jacobsen, (2010).Additionally, the article found several pieces of evidence proposing that the effect of the tribute bunch should have been partway expatriate within the rental arcade. Rentals have been evidenced to increase suggestively hence suggesting that it may be due to an increase in demand coming from potential buyers being incapable of financing the house purchases.
The findings of this article imply that as part of the process, the association between the interest rate of the mortgage as well as the house charges must not be ignored as the association rests a substantial one.
The article great depression of 2007 and the housing market crash which was written by Mohamad Ali Hasbini is the second article. According to the author the event of the “Great Recession” resulted in more instability in the homebuilding industry and the economy In general than any other economic down cycle. The crisis resulted at the end of many seasonal homebuilders in the country. The results of the crisis and the fall of many of the seasonal house builders affected the employment levels in the country as it affected many lenders and suppliers (Rusinov, 2016). In his study, the author used qualitative inquiry to find out the non-financial factors of the crisis. The author was motivated to carry out the study by the fact that many of the previous have concentrated much on the business failures which resulted to the crisis failing to tackle the factors of nonfinancial factors which resulted to the Great Depression.
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Besides evaluating the nonfinancial factors, the author seeks to find out strategies which can be included in different business models used by local homebuilders to assists them in surviving in a hard economic situation. In carrying out the study the author began by analyzing local homebuilders, business failure and then the analysis of the housing market crash due to the crisis. According to the author, government housing policies, poor banking systems, and subprime loaning systems are some of the factors which resulted in the Great Depression. Additionally, the acceptance of high risks investment by banks without the involvement of the government resulted in the crisis (Holt, 2009). This factors affected business which triggered crush in the housing sector. The evolution of residential homes from shelter to a product that could be traded in the financial market resulted in the creation of unsustainable demand.
The findings of this article were that, the housing market crisis was a connection which shifted market equilibrium. The crush in the housing sector was as a result of the activities of various participants of the market such as the government, bankers and the suppliers. The actions of the builders were balanced as they operated to meet the demand for housing in the market. The key cause of the disaster was the failure of the financial institutions to evaluate the perils factors related with the safeties offered in the housing markets.
The depression began in December 2007. Housing low-interest rate, poor standards of housing loans and short term interest rates are some of the major causes of the depression. The consequences of the 2007 housing industry crash can be understood well from several economic perspectives. The overall economic impacts of the depression will ever be remembered and changes in the banking sector will greatly change the housing sector.
- Bjørnland, H. C., & Jacobsen, D. H. (2010). The role of house prices in the monetary policy transmission mechanism in small open economies. Journal of financial stability, 6(4), pp.218-229.
- Fitzpatrick, T., &McQuinn, K. (2007). House prices and mortgage credit: Empirical evidence for Ireland. themanchester school, 75(1), pp.82-103
- Hasbini, M. A. (2017). The Great Recession of 2007 and the Housing Market Crash: Why Did So Many Builders Fail?
- Holt, J. (2009). A summary of the primary causes of the housing bubble and the resulting credit crisis: A non-technical paper. The Journal of Business Inquiry, 8(1), pp.120-129.
- Rusinov, G. (2016). Moral Hazard and Mispriced Systemic Risk in the Lead-Up to the 2007 Subprime Mortgage Crisis in the United States. Undergraduate Economic Review, 12(1), p.17.
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