Property bubble
The price of US housing increased significantly since late 1998 up to the peak on Jun
2006. The increase in price was higher than the average inflation in US. The monthly price
index increased from 120 on January 1998 to 220 on June 2006. On January 2011, the
index was down to 180, representing a 18% drop in five years. [Ref: 4] This property
bubble was resulted from two factors:
The interest rate remained low since 2001 as the Fed Reserve would like to push the
economy after the 11 September terrorist attacks and the dot-com bubbles. The
adjustable-rate mortgage (“ARM”) was even below 2% on 2003 [Ref: 5]. This created
initiative for people to invest in property. The low FED rate also encouraged people and
US government to spend further. As a result, the budget deficit increased by 650 billion
between 1996 and 2004. [Ref: 8]
Subprime refers to a borrower that is not prime and they might be less likely to repay a
loan. Subprime borrowers may be classified as subprime because of bad credit, low
income or poor debt to income ratio or maxed out credit card [Ref: 9] The value of
American mortgages estimated to be USD1.3 trillion on March 2007. The subprime
mortgages % was up from 10% in 2001 to 21% on 2006 and 2007 [Ref: 10]. Fannie Mae
and Freddie Mac are both congressionally authorized government-sponsored enterprises
(GSEs) and mortgage brokers. They are hybrids in that they are privately owned by