Housing Markets in the Financial Crisis of 2008 Essay

Housing Markets in the Financial Crisis of 2008 - Essay Example The origin of the housing market boom The boom in the housing market started growing as the stock bubble grew up in the last decade of the 20th century. In simple terms, the logic governing the growth of the housing bubble was one such that the wealthy were spending the money they had accumulated from the favorable stock markets (Baker, 2008, 73). The stock prices had run up in a manner extraordinary and many people had not anticipated. The wealthy therefore started spending at a rate similar to the rate of wealth accumulation. The increased wealth resulted in an increase in the average consumption and it was noted that the savings rate sourced out of every individual’s disposable income experienced a fall from 5% in 1995 to about 2% in the year 2000. The wealth gained from the favorable stock markets led to massive investments in the housing industry as people strived to buy bigger houses and to make better homes. The supply of housing is, of course, fixed so this therefore m eant that the sudden increase in demand was likely to cause the housing bubble effect (Baker, 2008, 73). This caused a chain of events starting by an increase in demand which automatically resulted in the house prices to rise. As the prices started rising in some of the areas affected there was a unique phenomenon such that the prices started being incorporated into expectations and these made the buyers of houses and homes to start paying more than they would otherwise have done. This had a tendency of making the expectations self fulfilling and more convincing. Research together with the data from the government’s documents pointed to a very slight change in the house prices for over 100 years before the beginning of the house bubble. Even as the price of the houses rose, the rent did not increase in a similar manner but it in fact remained trailing behind in a modest manner a clear indication that the price of the houses was as a result of the housing bubble (Baker, 2008, 74). The instantaneous increase in the price of the houses both for buyers and those renting them started creating a substantial effect on the supply side as a result of the rise in price from around 1995 towards 2000. The house prices rose up to about 25% in the year 2002. This was above the average rate of the three years from 1993 to 1995. This then resulted in to an effect that appeared as an oversupply in the number of rental housing sector for it caused the vacancy rate to rise to about 9% in the year 2002 which was 1.5% increase to that of around 1990 that stood at about 7.5%.