Question

Explain how falling housing prices that beginning in 2006 started a process leading to the financial crisis?

Answer 1

Realtors ' National Association revealed that current home sales ' median prices dropped 1.7 percent from the previous year. That was the greatest decrease of this kind in 11 years. The cost was $225,000 in August 2006. That was the largest percentage decrease since the November 1990 recession's record 2.1 percent fall.

Prices dropped due to the 3.9 million unsold inventory, 38 percent greater than the previous year. It would take 7.5 months to sell that inventory at the present sales pace of 6.3 million per year. That was the four-month supply nearly double in 2004. However, most economists believed it only implied that the housing market was cooling off.

Slowing housing demand lowered new home allows 28 percent from the previous year. According to the Report of the 17th November Commerce Department Real Estate, this leading economic indicator reached 1.535 million.

New home licenses are awarded approximately six months before building is completed and the mortgage is closed. This implies allowances are a leading indicator of closing new homes. A drop in licenses implies that for the next nine months, fresh home closures will continue to be in a slump. At the moment, no one knew how far subprime mortgages have reached the stock market and the economy as a whole.

Subprime mortgages repackaged by mortgage-backed securities into investments. That permitted investors to sell them. It has helped spread subprime mortgage cancer across the global financial community. The repackaged subprime mortgages have been sold by the secondary market to investors. Without it, banks would have had to hold onto their books all mortgages.

As house prices dropped, bankers lost each other's confidence. They were scared to lend to each other because as collateral they could obtain securities backed by mortgages. Once house prices began to fall, the value of these assets could not be priced. But unless banks lend to each other, the entire financial system begins to collapse.