Lessons Learned

1. How did the rising cost of real estate affect the Financial Crisis?

Trevino and Nelson contend that the financial crisis of 2008 was caused in part by an unprecedented flow of financial capital into commercial and housing markets. People at the time were under the impression that investing in real estate would be a safe and conservative option. According to Trevino and Nelson, “there had been relatively few instances of real estate value declining” so naturally, people put their money into what had always been considered a safe investment. However, what many did not expect was real estate becoming an overwhelmingly popular way to invest. 


Aided by historically low interest rates, by the early 2000s, demand had overtaken supply and the value of homes soared. People bought houses with no down payments in anticipation that their homes would be worth more in a few years than what they had paid for it. Homeowners mistakenly believed the value of their real estate could only increase. As a result, homeowners spent money on things under the premise that they could afford them based on the value of their homes. This would come back to bite them when housing values fell off a cliff in 2008 and 2009. Many homeowners were left with no choice but to declare bankruptcy and walk away from their house. Ultimately, the rising cost of real estate led people to spend more, leaving them with little when the housing bubble burst. 


2. Would Mills argue that having sociological imagination is beneficial to society?

Mills argues that having sociological imagination is critical for both people and societies to grasp. It would make society better in the sense that people would be more open-minded, and they would be able to answer questions by relating their personal lives and situations to societal issues. A person using sociological imagination is more able to think and act critically in accordance with evidence both relevant and irrelevant to himself/herself. For Mills, the key to understanding the value in such a perspective is in appreciating that one can only understand the motives, behavior, and actions of others by locating them within a wider and more meaningful context. So, yes, Mills would maintain that having sociological imagination is beneficial to society as a whole. 



What is the current real estate situation? How can we prevent the housing bubble from bursting again?

Real estate value is rebounding in full swing. Prices are on the rise. According to a recent report by Corelogic, “House prices are up 6.3% year-over-year in October, the largest increase since 2006 and eighth consecutive increase in home prices nationally on a year-over-year basis.” The future looks bright as well: J.P. Morgan thinks prices could gain another 10 percent in the next 12 months. Of course, there are reasons too be skeptical as this is the second time that prices rallied since the bottom fell out in 2006. Will this growth continue? Or is it the real deal this time? Something else to consider is just how much do we want real estate value to grow? It was surging prices that initiated the collapse in the first place. 


There’s already talk of the next housing bubble. As the market improves, we need to protect ourselves by shifting away from the incentives that helped create the real estate bubble that trapped us. We’d like to think that hard lessons were learned. However, we must stop relying on credit and bad mortgages. As the housing market recovers, we need to make some decisions that allow the housing market to rise on a strong, sustainable foundation.

Link: http://www.counterpunch.org/2012/12/18/the-mysterious-new-housing-bubble/

6 thoughts on “Lessons Learned

  1. This past semester I was able to take Investment Banking with Professer Gruver, and we learned about the history of investment banking in the first half of the year. We learned that a financial bubble consists of 4 separate parts: laissez faire government, leverage, low interest rates, and public participation. It is when these 4 elements begin to disappear that a bubble will burst. Looking back at the housing bubble of 2008, there was a rather laissez faire government, leverage was high for investors while interest rates were incredibly low, and the public trusted real estate and poured money into it. All of a sudden the interest rates begin to rise the same time as the market, which should have been a warning sign to the public, but because many investors didn’t pick up on any of this, the “public participation” element of a bubble was the last to disappear, but not without hurting people financially.
    Looking into the future, we can use the past to help us avoid or at least foresee some problems. The public should also become more informed on what investment vehicles they chose, and be able to read the appropriate signs of when things might head south. Also, the 2008 bubble lead to increased regulation, so we are far from a laissez faire government now. Overall I think a combination of the public being more informed about the real estate market and more defined regulation within the real estate/mortgage industry is what is necessary in order to avoid another real estate bubble.

    • I think the extent of new regulations in real estate or financial markets is open to debate. Laissez fair or not is not really a binary distinction. Instead, we should have a vocabulary to talk about both degree of regulation but also types. For example, a simple regulation is to reimpose a ban on commercial and retail banking mergers. Instead of doing this, Congress opted to try to regulate the current industry. So, simple or complex can be one dimension in addition to rigid or laissez faire.

  2. Vinny brings up some good points. Although I have not yet taken a class on Banking I have done a bit of reading on the history of hedge funds. I don’t think it is a matter of preventing bubbles from bursting but rather it is a matter of bursting bubbles sooner. Example: let’s say there’s a new company in town and its stock is selling like hot cakes (no idea what hot cakes are but let’s just roll with this). They sell, sell, sell, the public buys, buys, buys, and eventually the price of the stock is on the moon and rising. People are happy, thinking they made a sound investment but they have been “uninformed”. The stock is worth nothing, bubble pops, people try selling but no one will buy and now everyone takes a big loss. Now, rewind, suppose a hedge fund began shorting the “new company” stock the minute it hit the market because these professional traders could see right through the facade and knew the stock was worthless; The stock is never bought by hordes of people and little time and money is lost. Bubbles need to be popped earlier, unfortunately the government has historically strict regulations on shorting and other devices that can help save the public time and money.

  3. Good points, Frank. They remind me that what we need is a better definition of ‘bubble.” I would start with something like a large increase in the prices of a class of goods or assets that sustains for at least months if not years even as there is scant evidence of underlying economic value to support the increase.

    As your example suggests, every fluctuation in price is not per se a bubble. It is simply a market working.

  4. What would you think is the difference between sustained growth and a bubble in real estate? How can we figure out what those numbers are? 3% a year? 6%? 12%


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