Dont Throw Stones in a Bubble House

Matthew Myers
Matthewmyers@mail.usf.edu
GEO4502.001S15
Dr. Martin Bosman
March 31, 2015

In 2006 the housing market became a battlefield of shifty loan companies taking
advantages of loopholes in government laws. While Florida was the ground zero for this crisis,
these effects could be felt all over the country. This particular topic is still important, even almost
10 years later. We are still dealing with the remainder of the houses left and the mortgages left
unpaid. People are still being foreclosed upon and kicked out of homes that will stay unoccupied
for years to come. This is the basic idea to look into. This paper will delve into the description of
the housing crisis, the major players, the capitalistic standpoint, and governmental roles in it.

The best definition of a housing bubble that I found came from Investopedia. A run-up in
housing prices fueled by demand, speculation and the belief that recent history is an infallible
forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right
in the demand curve), in the face of limited supply which takes a relatively long period of time to
replenish and increase. Speculators enter the market, believing that profits can be made through
short-term buying and selling. This further drives demand. At some point, demand decreases (a
shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a
sharp drop in prices - and the bubble bursts.("Housing Bubble Definition | Investopedia.")

The real causes of the housing bubble and its burst break down into multiple things. These
causes were:
-Low interest mortgage rates
-Low short term interest rates

-Relaxed standards for loans

Journeying into the depth of the housing crisis starts with the issue of low interest mortgage
rates. In 2006 there were many private investors that actually came from foreign countries to help
keep our interest rates low over our ever growing bubble. These investors, primarily from China
and Japan, sought to have simple investments with great turnovers and low risks for their
investments. This was all being told to them by the people of Wall Street and our own government.
After all, our government is too big to fail right? So why not trust it. With these lower interest rates
more people were prone to get a mortgage to procure a home in what was seemingly a great market.
(Holt)
Going even further we see that there was also an issue with an attempt to help the nation
out of its recession. The federal government started to lower the federal funds to an all-time low
in 2004 which could possibly help the recovery of the recession. Of course this was not known to
be a hindrance at the time. (Konczal)
Now that these trenches are deep, why dont we try to help build a ladder to get out? Or
perhaps just dig ourselves deeper with the governments help. The government tried to increase
home ownership of the low-income families with new policy. With new policy comes new issues.
There were loopholes where companies could sell mortgages to multiple people and make money
on them. With this growing issue, these companies have increased debt but have spread it over to
multiple institutions for their gain. (Holt)

Lastly, people were dealing with doubt. Investors and companies thought that the
government was too big to fail and therefore would just bail out the industry. Those people were
steadfast in thinking that everything would just work out so they could keep going with their
everyday dealings. (Holt)

According to our lectures, this is a prime case that started with a huge capitalism scenario.
That scenario is the need for space. Space, that is physical and/or economical space, is needed to
make capitalism happen. Without, it will collapse and stop. The space we are talking about is
actually both. There was an explosion of physical space for expansion that heavily founded its
roots in Florida and the rest of the nation took part. But the economical aspect of this space is what
hurt it the most. This space would have provided growth which is vital for capitalism in the form
of interest gain. This gain in the form of interest is what basically started the entire crisis. It enticed
the foreign investors to put forth money with low interest rates to receive a monetary gain with
little risk in the end. Those investors created an effective demand that had little or no purchasers
at the time. But with this low interest rate, people were willing to take a try in our buyers market.
This worked for a while to cause people to buy these homes they could not afford. What no one
really noticed was the growing bubble that they created because of the governments quantitative
easing that was establish just before the investors offered these low interest rates. With these
lowing rates, the bubble grew bigger while the people borrowing became unable to keep those
mortgages. At this point no one really knew what was to come. The current investors kept investing
thinking that the government would eventually bail them out if something went wrong. Of course,
they were completely wrong. Now we have the issue of the government trying to fix the industry
by implementing better buying advantages for lower income families. This was basically thought

to be a sort of bail out of sorts to get the houses sold. But what they didnt take into account was
the fact that these lower income families couldnt afford to pay these mortgages even with the
lowest interest rates of all-time. The capitalistic nature for special-temporal fixes wouldnt help
the longevity of the crisis but actually hinder it even more. Lastly we see that even after the raw
data started to pour in that the crisis was actually happening, the investors still believed that the
market couldnt fail. That it was too big to fail. They of course were wrong but the fact that they
were so sure that the government would supersede the issue and step in kept them investing even
after they were losing money. They figured that their investments would still acquire gain even if
it wasnt initial. There blindness for facts is very capitalistic in nature. And overall was their
downfall.

In conclusion, there were many players that hindered the housing crisis. The government,
investors, and investees were all to blame. The idea that anything is too big to fail is flawed and
even in our capitalistic nation we are not above terrible spending. Lowering interest rates will
attract buyers, but those buyers may not be able to pay for the gains on the loans. Pre-emptive
building didnt help either. As I always say, dont count on milk from a cow thats not born yet.
But ultimately you cant always trust the government and Wall Street for your investing needs.

Works Cited
Holt, Jeff. "A Summary of the Primary Causes of the Housing Bubble and the Resulting
Credit Crisis: A Non-Technical Paper." January 1, 2009. Accessed March 31, 2015.
http://www.uvu.edu/woodbury/docs/summaryoftheprimarycauseofthehousingbubble.pdf.
"Housing Bubble Definition | Investopedia." Investopedia. May 22, 2007. Accessed
March 31, 2015. http://www.investopedia.com/terms/h/housing_bubble.asp.
Konczal, Mike. "No, Marco Rubio, Government Did Not Cause the Housing
Crisis."Washington Post. The Washington Post, 13 Feb. 2013. Web. 31 Mar. 2015.
<http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/no-marco-rubio-governmentdid-not-cause-the-housing-crisis/>.