The early 2000s were a godsend for many consumers. Credit circulated with relative ease, making it almost impossible to turn down a loan, credit card or mortgage. Subprime loans were rampant, not only delivering big profits for investors and businesses, but also helping many people realize the American Dream by allowing them to own homeowners. While a blessing to many, the financial woes of this period helped spark the mortgage crisis and the Great Recession. As a nation, we certainly had to pay for our indiscretions and the aftermath of the crisis will be with us in the future. Here are five consequences of the subprime mortgage crisis.
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Key points to remember
- Once prosperous suburban areas have seen an increase in vacant housing, with entire neighborhoods in disrepair.
- Many homeowners are still at risk of foreclosure.
- Unemployment rates have come down, but economists predict they will rise by 2030.
- Credit did not flow as easily as it did in the run-up to the subprime mortgage collapse.
- Almost half of Americans say they expect to live paycheck to paycheck.
The subprime mortgage crisis: an overview
Just before the subprime mortgage collapse, the economy was on the verge of a recession due to the tech bubble. Companies in this sector have seen a sharp increase in their valuations and investment in the industry has also been very high. In response to this, the central bank authorities attempted to stimulate the global economy by cutting interest rates. As a result, investors hungry for higher returns began to turn to riskier investments.
Lenders have done so too, as they have started approving mortgages to people with bad credit. Some of these people also had no income and no assets. Lenders repackaged these loans into special investment vehicles – mortgage backed securities (MBS) – and sold them to investors. But as demand increased, the housing bubble eventually collapsed, wreaking havoc throughout the global economy.
The rise of the slum
The crisis has sparked an avalanche of real estate foreclosures that have left large sections of once prosperous suburban neighborhoods vacant and in disrepair. The suburbs also saw a sharp increase in poverty which, according to the Brookings Institution, was home to about a third of the country’s population living below the poverty line.
This phenomenon is perhaps most visible in and around Midwestern cities such as Grand Rapids, Michigan and Youngstown, Ohio. The shift from a quiet suburb to struggling neighborhoods is the result of a combination of factors, including the housing bubble and rampant real estate foreclosures, as well as immigration, changes in the workforce (labor force levels). higher income and unemployment) as well as an increase in the population.
The recovery was not easy. The effects persist in parts of the United States, including the Rust Belt, even in cities in California. Large communities continue to experience high vacancy rates, with many people unemployed and living below the poverty line. Michigan’s unemployment rate, for example, was 4.1% in October 2019, higher than the national rate of 3.6%.
The ongoing foreclosure mess
In addition to putting people in the position of needing to find another place to live, the Federal Reserve says the foreclosure can hurt the prospects of a comfortable retirement because a home is the main asset of millions of Americans. This is, of course, in addition to the damage a foreclosure can do to a homeowner’s credit score.
The wave of foreclosures that accompanied the economic crisis was just the beginning. Although the numbers are not where they were after the subprime mortgage crisis, people continue to lose their homes – with no end in sight. Around 300,000 foreclosures were recorded in the first half of 2019, according to a MarketWatch report. Locally, housing starts jumped in 42% of the country’s local markets.
The national unemployment rate hovered around the 10% mark following the collapse in subprime mortgages, but has trended downward since then. In January 2020, the country’s unemployment rate was 3.6%, according to the Bureau of Labor Statistics (BLS). But the unemployment rate in some states is still above the national average. At the end of January 2020, Alaska’s rate was 6.1%, DC’s was 5.3%, while Mississippi’s was 5.7%.
But the national unemployment rate is expected to increase to one percent by 2030. While that doesn’t sound like much, local and state unemployment could also increase.
Unemployment is expected to increase by 2030.
Just like low unemployment, quick home loan approvals and unlimited access to credit are a thing of the past. While anyone could get a credit card or be approved for a mortgage before the economy collapsed, even those considered qualified borrowers can struggle to get approved. By some estimates, only one in 10 home loan applications were approved following the stock market crash.
More time to make ends meet
There is no doubt about it. Things have been tougher in general since the start of the crisis, especially for the middle class. In fact, 49% of Americans polled by the First National Bank of Omaha said they would likely live from paycheck to paycheck in 2020, according to a report from Yahoo Finance. More than half of those surveyed do not have enough savings to cover more than three months of expenses.
The bottom line
Despite the bleak image it presents, all is not bad. Interest rates are at record highs, saving a lot of money on interest for those who can get loans. And inflation hasn’t played a major role in the past year and therefore hasn’t eroded the value of our money. Additionally, economists say the economy is heading in the right direction with growth expected until around 2029.