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Flashcards in Housing Bubble Deck (18)
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1
Q

What are the 2 main contributing factors to Rising house prices?

A

Physical Barriers to Expansion

Median Family Income

2
Q

How do Physical Barriers to expansion affect house prices?

A

Result in INELASTIC SUPPLY in the S/M Run

3
Q

How do Median Incomes affect House prices?

A

Rising Incomes–> Increased DEMAND for housing

4
Q

What other factor, besides median incomes + physical barriers, can increase house prices?

A

Population Growth

5
Q

Draw the Supply + Demand diagram for a housing bubble

A

Perfectly Inelastic SR Supply
Perfectly Elastic LR Supply
Downward sloping Demand curves
Demand Shifts to the RIGHT to show Bubble Demand

6
Q

Define Mortgage

A

Payment scheme designed to bring the original debt used to buy a house to Zero over a period of time

7
Q

What Association in the USA Securitised Mortgages?

A

Federal National Mortgage Association- Fannie Mae

FNMA

8
Q

What did Banks sell to FNMA? And what did FNMA do with these products?

A

Banks sold Mortgages
FNMA bundled Mortgages together to create Geographically diverse products–> Low Risk–> Investors bought Bundles–> Reduced Mortgage rates–> Increased Affordability

9
Q

What are the 2 types of Mortgages that increased House Prices further?

A

Interest-only Mortgages
Negative-amortisation Mortgages
Buyers may not have understood terms of these mortgages- increased overall cost of mortgage despite offering initially lower monthly payment cost

10
Q

What 5 factors caused the Housing bubble?

A
Expectations
Banks did not own Mortgages
'Liar Loans'
Technology
Credit Default Swaps (CDS)
11
Q

How did Expectations contribute to the Bubble?

A

People expect prices to Rise in future–> Buy Assets Now–> Increases Demand–> Expect to Sell later at higher price

12
Q

Why didn’t Banks own the mortgages + why was it an issue?

A

The Mortgages were sold together as bundles days after being written-off
Issue because when people defaulted, Banks had houses but no liquid assets to pay back Investors

13
Q

What are Liar Loans?

A

Negative-amortisation loans sold without the Bankers verification of Borrowers Income/Assets
-Only consulted Credit-rating agencies

14
Q

What was Technology’s role in the Bubble?

A

Mortgage application automated online- easier to apply + get a Mortgage

15
Q

What are Credit Default Swaps (CDS)?

A

Insurance on Mortgage-backed securities (MBS) in case borrowers’ default
Eased Investors concerns- kept bubble going
CDS was not regulated as Insurance policies
Due to growing economy, everyone was too happy to be concerned w/ CDS

16
Q

What happened when the Bubble BURST?

A
House Valuations DECREASED
Borrowers Default on Mortgages
Bank repossess house/Borrower sells house but does not cover Mortgage due to Lower House Price
Bank Loses out
Bank goes BUST
17
Q

What was the effect of the Housing bubble bursting on the overall economy?

A

Late 2007- Bubble impact snowballed- Securitised Mortgages’ value in Doubt–> became apparent in 2008- Lehman Brothers collapse

18
Q

What measures did the US Gov. take to prevent massive Financial meltdown?

A
  1. Took ownership in lenders/banks- Took equity stakes in US financial institutions in exchange for Capital
  2. Nationalisation- US Treasury took Ownership of Fannie Mae + Freddie Mac
    - Federal Reserve took a stake in AIG- Insurance firm
  3. Toxic-asset Purchases- Fed Reserve removed some Toxic Assets (Securitised Mortgages) from Banks’ balance sheets