Root Cause Of The Housing Bubble
The root cause of the housing bubble in the United States was the lending practices adopted by lenders when issuing mortgages to potential home buyers. In fact, if you go back in time, there no a borrower could not qualify for a mortgage if he was interested in purchasing a home. |
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Borrowers were able to get a massive mortgage of around $300,000 just for $1,000 a month installment, and that too without any down payment. The down payment was the take home pay for many workers across the US who qualified as minimum wage workers. This attracted a lot of people, who otherwise would not have been able to afford homes. And, due to increase in demand, house prices started soaring.
The ability to get a mortgage without making any down payment created a completely new category of home buyers. And, the increase in home prices also attracted many buyers who saw it as an opportunity to invest. Nearly 40 percent of homes purchased during the housing bubble ended up becoming second homes and vacation homes for the owners. Some people also went on a buying spree as they did not need to make any down payment to buy homes. These were the investors, who would make improvements to the homes and then sell them for a profit. Then there were home owners who ended up borrowing against the equity of their properties to use the money for varied purposes. They could afford to do this as suddenly their homes were worth a lot more.
Therefore, it can be said that the root cause for the housing bubble in the United States was the ease with which home buyers could get mortgages. However, one should not overlook the role of the investors who kept buying homes, and causing an artificial rise in home prices.
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