Essay on The Financial Crisis Of The Housing Crisis

1251 Words Oct 1st, 2014 6 Pages
The roots of the most recent financial crisis, like most crises of this sort, can be traced back to a bubble, in this case the housing bubble. Between 2000 and 2005 the median sales price of a home in the United States rose from $143,600 to $219,600, a 53% price bump (Sowell, 2009). The housing bubble was even more pronounced on the west coast where land is at a premium: In Los Angeles and San Diego, the median home price rose 110% and 127% respectively.

The financial instrument at the heart of this growing housing market is called a mortgage, a conditional conveyance of property as security for the repayment of a loan, often a loan for the property itself. The banks that make these loans evaluate the credit worthiness of the borrower, and based on the degree of credit worthiness, decide whether to make the loan and what rate of interest to charge (it is through interest on a loan that banks make the lion 's share of their profit). Typically, the better the credit, the lower the interest rate. This is the mechanism of home ownership that has been used in America for decades.

So how did home mortgages bring the global economy to its knees? One scapegoat that has emerged among conservative punditry particularly is low and moderate income families on whose behalf liberal politicians advocated for more affordable housing. Conservative economist Thomas Sowell (2009), for example, traces this economic crisis to as far back as 1977 and the Community Reinvestment Act. The CRA is…

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