The emergence and burst of the real estate bubble in the United States

Global economic history is characterized by periods of irrational euphoria in which fundamental economic principles are overridden in favor of short-term gains. The massive expansion of the real estate loan market in the United States after the change to the new century is particularly striking. In this phase, basic rules of creditworthiness check were establishedDeliberately ignored to generate seemingly inexhaustible returns. The system based on the assumption of constantly rising real estate prices inevitably led to that momentous collapse that triggered global economic dislocations. The events of that time reveal the dangerous consequences of that financial architecture, the real economy and speculation inseparablelinked together.

The tempting offer for unworthy people

That man from that metropolis in the southern United States was in a precarious financial situation. He only had a lean and strongly fluctuating income from temporary work. He could not build up any worthwhile fortune at his advanced age. So he was quite amazed when several nice and dynamic young men visited him that day andmade him that almost fairytale offer. That beautiful settlement with larger houses and small terraced houses is created on the outskirts of the city.

Concealment of true credit terms

That little terraced house for that considerable amount of money is just right for this man. The addressed felt flattered, but remained honest man. He asked his interlocutors if they knew about it, since he was just without a permanent job and had hardly any savings. Those advisors stayed relaxed and also advised the man to take this relaxed attitude.They put the conditions on the table and promised full pre-financing of the property price plus all additional acquisition costs.

The deceptive security through variable interest rates

In the early years, repayment benefits are suspended. The consultants did not mention that the loan was calculated with a correspondingly lavish interest rate due to the customer’s high risk class. Instead, they babbled in detail about variable interest rates with initially fixed low interest rates. In these constructs, the borrower initially pays very low, fixed interest rate. after thatthe interest will be adjusted, although we can’t say anything specific yet, because everything will look very different in the future.

The illusion of constant increases in value

The consultants painted that rosy picture of a good job and a good salary in the near future. They also promised massive increase in the value of the property within a short time. The man will get a significantly higher amount of money for the house if he really wants to sell it. The business in the gold burial season of the American real estate market was about the same after the change to the new onecentury from. Such loans were granted to people without income, labor or assets, but they still seemed to be creditworthy in any way.

The supposed growth potential in the high-risk segment

Other names for these financial products were loans to people with low credit ratings. The financial industry saw great potential for growth here if you only approached the matter creatively. There was plenty of money for such loans. The financial world believed in favorable situation for everyone involved until the middle of the past decade. The dynamic consultants had alreadymassive self-interest in such business.

The profiteers of the questionable lending business

These actors collected high commissions, some as real estate agents, others as financial intermediaries. This drove up the additional acquisition costs for the properties and led to house buyers having to finance the sum that was significantly higher than the price of the property. The borrower then had to take out much higher amount than loan and was the one who took the many participantshad to alimonize. In addition to the financing bank and the broker, downstream financial investors were also involved. The construction industry also boomed vigorously and represented that wonderful real-economic growth factor.

The global spread of toxic financial products

The financial world pretty much wrapped the loans as complex securitized bundles of credit and sent them around the world. International investors should also participate in the American miracle, at least indirectly. The result of this gigantic window dressing is known to all of us. At the latest after the bankruptcy of that important American investment bank, the Americans had with thisHouse boom led the world into that most serious economic crisis in numerous decades. Even that small portion of common sense would have been enough to recognize the insanity.

The limited options for action of the borrowers

If you had taken the trouble to collect all the facts and look at them realistically, the madness would have been obvious. Without having prophetic gifts, it is not difficult to imagine that there are, in principle, several options several years after the conclusion of the business. Either the borrower has a good job again, he likes the house, he wants to continue therelive and he earns enough money to pay off the loan and pay the interest. Or he remains without a good job or he does not manage to pay the interest and repayment payments due to his income. In the best case, things are going well for the banks involved.

The high margins and the risk of foreclosure

The margins are very high due to the usury interest rates, but are still achieved. In the worst case, the financing bank or the bank affected by the securitization process must see how to get their money. The house is auctioned in such a scenario. As a rule, American bank had to go to the middle of the past decade for this caseSeldom fear not to get your money back in full. Because real estate prices rose and rose incessantly.

Belief in the eternal growth of real estate prices

That significant American real estate price index increased enormously within a few years. From the end of the last century, he climbed massively, even though new housing estates were constantly being planted in the landscape that expanded the range. For those who believed in eternal growth, that assumption was very realistic. They assumed that the borrower’s housethat increase in value would achieve. This increase in value would have been able to cover that financing volume, which is significantly higher than the property value.

The inevitable bursting of the speculative bubble

The insane system of loans for people without income could only work if real estate prices are constantly rising. Like that expanding giant balloon, the bubble feeds those who blow, as well as those hanging under the balloon. This will work until the balloon bursts. Then scraps of rubber fly around the ears of the parties involvedand everyone tumbles down. The consequences of this collapse have been a burden on the global economy to this day.

The historical classification of the financial crisis

If you look at these developments from a higher perspective, the pattern of the financial industry that has become a purpose for itself is revealed. The original function of the credit system, namely the combination of savers and productive investments, was replaced by systems from highly complex forward transactions. This decoupling from real value creation harbors enormousRisks for the entire economic structure. Virtual losses in the financial sphere are transferred to the real economy at all times and hit the weakest members of society the hardest. It is necessary to focus on the actual tasks of the financial sector in order to ensure sustainable and fair economic orders.