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During the early 2000s, housing prices were rising 10-15 percent a year. The housing market seemed like the perfect way to make fast cash!
This belief (that housing prices would continue to increase) created a BUBBLE: “Unsustainable rapidly rising prices of some type of asset (such as stocks or houses).”
LEVERAGE: “Borrowing to make investments.”
HERDING: “The human tendency to follow the crowd.”
The anatomy of a BUBBLE includes:
NINJA loans – No Income, No Job Applicants. People bought houses that they couldn’t really afford.
SUBPRIME MORTAGES: granted mortgages to people who did not have the financial assets or earnings to pay off the loan unless housing prices rose
This type of lending made the housing price situation “unsustainable”.
There was a sudden large supply to the market because people had to sell their houses- ultimately depressing prices, and causing the bubble to BURST
Government bailouts may cause a MORAL HAZZARD: participating in riskier behavior because the expectation is that one will be rescued, or bailed out
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