Meltdown of the Us Financial Markets

Meltdown of the US Financial Markets

Paul E. Lincoln, III

12 February 2008

Financial Analysis

Anna Maria College

Professor Carl Bindoo

After the fall of the stock market bubble in 2000-2002, the housing bubble continued to grow. Previous to the fall, with their increased wealth, more and more people were buying homes and were buying homes larger than they previously could afford. This did not stop even with the stock market falling, as people saw the shied away from the investment in currently volatile stocks and tended to put their money into supposedly more secure investments, like land and houses.

The housing bubble began to burst in 2007 and its results carried over to the financial market burst in 2008. Prior to 2007, record lows in interest rates accompanied with dramatic declines in the stock markets, people were looking to invest their money in more “safe-alternatives” by purchasing things like land and houses. Further, with the low interest rate, many were encouraged to refinance to adjustable rate mortgages (ARMs) to take advantage of the remarkable rates. This ever increasing demand for housing caused the supply chain of building to attempt to keep up. This notion led to a dramatically heavy increase in the building supplies and construction business areas. In 2007 though, the building boom came to a halt as the supply had become excessive and the demand for housing could not meet the high prices sought. Thus began the decline back to equilibrium of housing prices, and as a result this led to many homeowners facing foreclosure. Equity in people’s houses became so low that many prices valued lower than the outstanding mortgages. With the value of the mortgage being higher than that of the actual home, many decided to simply give up their homes in order to save themselves paying more in the long run than its actual worth.

Initially these factors affected the construction and mortgage lending sectors in the marketplace, but what...