Peter Schiff, the president of Euro Pacific Capital, predicted the housing market crash of 2008. In 2005, the told Kudlow & Company: “The basic problem with the U.S. economy is that we have too much consumption and borrowing and not enough production and savings. And what’s going to happen is the American consumer is basically going to stop consuming” (Sterbenz, 2013).
The Great Recession of 2007 to 2009 is attributed mainly to the collapse of what is known as the “subprime” mortgage market. Subprime mortgages are a type of high-risk loan made out to borrowers with low credit ratings and inadequate savings, also known as “subprime borrowers” (Field, 2021; Kosakowski, 2021). The subprime mortgage market grew significantly at the start of 1999 as Fannie Mae and Freddie Mac (U.S. government-sponsored mortgage lenders) offered home loans to subprime borrowers. These loans were adjustable-rate mortgages (ARMs) where initial payments are much lower than those under a fixed-rate mortgage loan. After a period of two or three years, the ARM resets causing payments to fluctuate, resulting in significantly larger monthly payments (Kosakowski, 2021). As house prices began to plunge and homeowners started defaulting on their ARMs, this left them owing more to the bank than the worth of their homes.
For homeowners unable to make the higher monthly payments, their homes were lost to foreclosure and many filed for bankruptcy (Kosakowski, 2021). Foreclosures soared to approximately three million a year in 2009 and 2010, and in October of 2009, unemployment reached a rate of 10% (Field, 2021).
The housing crash of 2008 was the result of several different factors and not only the collapse of the subprime mortgage market. The economic growth experienced between the mid 1980s and 2007 was called the “Great Moderation” due to the belief the economy would continue to grow, driving investors to bid aggressively and taking on large amounts of debt. This granted for a period of de-regulation that allowed banks and brokerage firms to grow significantly as a result of the 1999 countermand of the Glass-Steagall Act, a depression-era legislation established to separate commercial and investment banking (Field, 2021).
In response to the Great Recession, the federal government set interest rates to zero in a strategy to buy more financial assets and introduce large amounts of money back into the economy. This gave birth to two major programs to provide emergency support as follows: (1) Troubled Asset Relief Program (TARP) where the government procured close to $700 billion in assets in efforts to stabilize the economy and using most of it to bail out banks in trouble, and (2) The American Recovery and Reinvestment Act (ARRA) which is a stimulus package established in 2009 to implement a multitude of actions to jump-start the economy like tax cuts, unemployment benefits, government spending directives, and guarantees on certain loans (Field, 2021). Then in 2010, the Dodd-Frank Act was signed into law to reform financial industry-related regulation.
A Country Financial survey in 2019 showed that 50% of Millennials rated their financial security level as fair or poor, as this generation is considered to have received the short end of the stick and are still dealing with the effects of the Great Recession.
Millennials tend to carry high levels of student loan debt, diminished savings, and many are opposed to becoming homeowners for the same reasons (Field, 2021).
The housing market crash of 2008, also known as “mortgage crisis” or “credit crisis” (Kosakowski, 2021), set in motion a multitude of deteriorating ripple effects that stalled the country’s economy, resulting in the second worst crisis in U.S. history (Field, 2021). Both financial and political (policy) forces contributed to the crisis, first by the prevalent de-regulation period allowing banks to grow non-stop without consequence, and second, encouraging people to buy homes even if their credit rating was less than adequate. At the time, the process of verifying loans was careless and inappropriate, so much it earned the nickname of “NINJA loans,” which stands for “no income, no job, and no assets” (Field, 2021). The financial implications of the housing market crash drove unemployment to high levels, and also impacted an entire generation of Millennials who possess less wealth than the previous generation at a similar age (Field, 2021).
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