In the last ten years, the worldwide economic recession that reached its peak in December 2007 was more severe than any other economic depression. However, the house prices have been rising steadily in the United States since 2006’s housing bubble burst. This prompts us to examine the Great Recession and subsequent housing bubble explosion. For many years, the United States had enjoyed a boom. The advantages enjoyed before the burst of the bubble vanished in just a few months. Millions of Americans lost their jobs, and they began losing mortgages. The U.S. Census shows that the 2006 peak in home prices was $315,000. This is a change from the 1995-2000 period. As the 2000 average home price was $208,000 the equilibrium was shifted left. This was then followed by loose lending by the financial sector, with lower or no requirements and higher interest rates. The result was increased mortgage demand and more loans at lower rates.
Federal Reserve instituted a constrictive monetary policy. This resulted not only in an increase of interest rates but also a decline in loans that were taken out by individuals and businesses. Because it was less appealing to get loans, the requirement to invest money increased. Due to rising interest rates, borrowing for expensive items such as cars and houses became less attractive.
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