Theu.s. Housing Market And The U.s. Financial Crisis

The credit crunch, which occurred in the U.S. housing market between 2007 and 2009, led to the biggest global financial crisis. The impact of this crisis extended over the world, and the economies of many countries were damaged. Kawai stated that: ‘The ongoing global crisis has had a profound impact on the Asia and Pacific region, particularly on its exports.’ (2009:1) There were a lot of factors which brought about the crisis. Due to limited space, this essay will look at the U.S. housing market and the U.S. financial system, and discuss the increasing demand of the subprime market as the most important factor bringing about this crisis. There are three parts in this essay. The first part of this essay will focus on the causes of the†¦show more content†¦According to Marshall (2009), the dramatic increase of house price in the US was more than double from 1998 to the end of 2005, and the rising house prices were the result of large increase in demand. Increasing demand in houses caused the housing bubble. There were three causes which supported subprime market and the creation of the bubble. The first cause of the housing bubble is low interest rates which resulted from inflow of large amount of foreign money since investors from other countries believe that investment in the U.S. provided low risk and good returns for them. Holt illustrated that: ‘Mortgage interest rates were falling despite the low savings rate in the U.S. because of an influx of saving entering the U.S. from other countries’ (2009:121) The Federal Reserve preserved low interest rates policy in order to stimulate economic growth. The interest rates of mortgage market were kept low therefore demand of mortgage lending market went up rapidly. Moreover, mortgage agencies made low short term interest rates for example adjustable rate mortgages (ARMs) to encourage house buyer and investment with borrow money. The low interest rates encouraged more people to borrow money in financial market that led to excessive demand in the market and the housing bubble. The second cause of housing bubble