Between 2007 and 2009, the United States experienced a significant downturn in its housing market, with the most pronounced effects felt in 2008. This event not only triggered a global financial crisis but also destabilized economies worldwide. While multiple factors contributed to this crash, two major ones stand out:
1.) Housing Bubble Burst: The housing market witnessed a surge in prices followed by a rapid decline, known as the bursting of the housing bubble. Essentially, housing prices were artificially inflated, driven by overly optimistic market sentiment, inevitably leading to a correction.
2.) Subprime Mortgage Crisis: This crisis stemmed from borrowers' inability to repay their loans, particularly in the subprime mortgage sector. Subprime mortgages are loans granted to individuals with low credit scores who are deemed high-risk borrowers. Consequently, they fail to qualify for prime mortgages due to the elevated likelihood of loan default.
Significantly, the US housing market was inundated with subprime mortgages, leading borrowers to default on loans they should never have been granted. Essentially, US lending institutions constructed a ticking time bomb within the housing market. The fuse was ignited in 2007, culminating in a full-blown explosion in 2008. The repercussions of this economic detonation reverberated worldwide, precipitating the global financial crisis.
Now let's look at other big crashes in US history.
The Panic of 1837
The century spanning from 1800 to 1900 was characterized by numerous peaks and downturns in the real estate market, echoing patterns seen in contemporary markets. One of the earliest and most notable examples occurred in 1837, when a stock market peak triggered a depression that persisted until the 1840s, known as the 'Panic of 1837'.
The Panic of 1837 stemmed from a combination of domestic and international factors. Speculative lending practices, a precarious land bubble, and a decline in cotton prices all exerted significant pressure on the economy.
By May 1837, banks started suspending payments and loans, precipitating a recession that endured for nearly seven years. This recession led to bank closures, business shutdowns, widespread unemployment reaching levels as high as 25%, and economic hardship for thousands of workers.
The resurgence of bank lending came with the onset of the gold rush in 1849, as people sought to establish new lines of credit. However, this reprieve was brief, as the outbreak of the Civil War in the early 1860s plunged the nation into further turmoil, resulting in significant casualties and economic disruption.
By 1873, another crisis emerged as falling stock prices led to a prolonged period of below-average interest rates. A similar downturn occurred in the 1890s, further suppressing interest rates and setting the stage for a challenging start to the 20th century.
The 1873 Stock Market Crisis
The 1873 Stock Market Crisis, also known as the Panic of 1873, originated in the United States but reverberated globally, precipitating widespread economic downturn and financial instability. Its catalyst was the speculative expansion of the railroad industry, resulting in excessive investment and subsequent depreciation in railroad securities.
The collapse of numerous banks exacerbated the economic crisis, with several well-established institutions faltering. Among these, Jay Cooke & Company's downfall stood out, driven by overcommitment to railroad stocks and securities. This event triggered widespread societal panic, a flurry of bank runs, and numerous bank failures across the nation.
While the Panic of 1873 impacted various sectors, its influence on the US housing market, though indirect, was significant. Constricted credit availability restricted access to loans, diminishing demand for housing. The economic downturn and declining incomes further dampened housing demand. Depression and deflation led to a decline in property values, widespread foreclosures, and increasingly difficult conditions in the housing market.
The Great Depression (1929 - 1939)
The most significant crash of the 20th century occurred in 1929, with the Wall Street crash ushering in the Great Depression. Following this crash, property prices plummeted by as much as 67%, accompanied by a decrease in bank lending. Just a decade prior, the real estate market had been thriving, with areas like Manhattan in New York representing nearly 10% of the nation's real estate wealth. However, by the end of 1933, this same market had lost over half of its value. The repercussions of this crash were felt in property markets until around 1960, when prices finally began to recover.
The depression persisted until after the Second World War, during which the economy and real estate markets gradually rebuilt. The subsequent real estate cycle remained stable until the stock market hit another low in 1974. In the years leading up to 1970, inflation surged from under 2% to over 6%, nearly doubling the cost of a new home. Over the next two decades, home prices continued to rise, buoyed by legislation that encouraged banks and lenders to extend funding with minimal regulatory oversight.
Until the late 1990s, the market saw growth driven by increases in real estate collateral and expanding credit options. While things seemed stable on the surface, real estate investors still faced significant challenges. A savings and loan crisis led to a rise in interest rates, new home construction plummeted to levels not seen since World War II, and housing prices remained stagnant until the close of 1997.
1.) Housing Bubble Burst: The housing market witnessed a surge in prices followed by a rapid decline, known as the bursting of the housing bubble. Essentially, housing prices were artificially inflated, driven by overly optimistic market sentiment, inevitably leading to a correction.
2.) Subprime Mortgage Crisis: This crisis stemmed from borrowers' inability to repay their loans, particularly in the subprime mortgage sector. Subprime mortgages are loans granted to individuals with low credit scores who are deemed high-risk borrowers. Consequently, they fail to qualify for prime mortgages due to the elevated likelihood of loan default.
Significantly, the US housing market was inundated with subprime mortgages, leading borrowers to default on loans they should never have been granted. Essentially, US lending institutions constructed a ticking time bomb within the housing market. The fuse was ignited in 2007, culminating in a full-blown explosion in 2008. The repercussions of this economic detonation reverberated worldwide, precipitating the global financial crisis.
Now let's look at other big crashes in US history.
The Panic of 1837
The century spanning from 1800 to 1900 was characterized by numerous peaks and downturns in the real estate market, echoing patterns seen in contemporary markets. One of the earliest and most notable examples occurred in 1837, when a stock market peak triggered a depression that persisted until the 1840s, known as the 'Panic of 1837'.
The Panic of 1837 stemmed from a combination of domestic and international factors. Speculative lending practices, a precarious land bubble, and a decline in cotton prices all exerted significant pressure on the economy.
By May 1837, banks started suspending payments and loans, precipitating a recession that endured for nearly seven years. This recession led to bank closures, business shutdowns, widespread unemployment reaching levels as high as 25%, and economic hardship for thousands of workers.
The resurgence of bank lending came with the onset of the gold rush in 1849, as people sought to establish new lines of credit. However, this reprieve was brief, as the outbreak of the Civil War in the early 1860s plunged the nation into further turmoil, resulting in significant casualties and economic disruption.
By 1873, another crisis emerged as falling stock prices led to a prolonged period of below-average interest rates. A similar downturn occurred in the 1890s, further suppressing interest rates and setting the stage for a challenging start to the 20th century.
The 1873 Stock Market Crisis
The 1873 Stock Market Crisis, also known as the Panic of 1873, originated in the United States but reverberated globally, precipitating widespread economic downturn and financial instability. Its catalyst was the speculative expansion of the railroad industry, resulting in excessive investment and subsequent depreciation in railroad securities.
The collapse of numerous banks exacerbated the economic crisis, with several well-established institutions faltering. Among these, Jay Cooke & Company's downfall stood out, driven by overcommitment to railroad stocks and securities. This event triggered widespread societal panic, a flurry of bank runs, and numerous bank failures across the nation.
While the Panic of 1873 impacted various sectors, its influence on the US housing market, though indirect, was significant. Constricted credit availability restricted access to loans, diminishing demand for housing. The economic downturn and declining incomes further dampened housing demand. Depression and deflation led to a decline in property values, widespread foreclosures, and increasingly difficult conditions in the housing market.
The Great Depression (1929 - 1939)
The most significant crash of the 20th century occurred in 1929, with the Wall Street crash ushering in the Great Depression. Following this crash, property prices plummeted by as much as 67%, accompanied by a decrease in bank lending. Just a decade prior, the real estate market had been thriving, with areas like Manhattan in New York representing nearly 10% of the nation's real estate wealth. However, by the end of 1933, this same market had lost over half of its value. The repercussions of this crash were felt in property markets until around 1960, when prices finally began to recover.
The depression persisted until after the Second World War, during which the economy and real estate markets gradually rebuilt. The subsequent real estate cycle remained stable until the stock market hit another low in 1974. In the years leading up to 1970, inflation surged from under 2% to over 6%, nearly doubling the cost of a new home. Over the next two decades, home prices continued to rise, buoyed by legislation that encouraged banks and lenders to extend funding with minimal regulatory oversight.
Until the late 1990s, the market saw growth driven by increases in real estate collateral and expanding credit options. While things seemed stable on the surface, real estate investors still faced significant challenges. A savings and loan crisis led to a rise in interest rates, new home construction plummeted to levels not seen since World War II, and housing prices remained stagnant until the close of 1997.