The first six years of the 21st century saw an unparalleled rise in house prices in the United States. In real terms, prices increased by more than 70% from January 2000 to June 2006 according to the S&P/Case-Shiller home price index. However, since then, the boom in real estate markets has quickly turned into a bust, with prices dropping by more than 25% in real terms until June 2008. This dramatic decline in U.S. house values lies at the root of the current global financial and economic crisis. Initially, the decline in house prices led to a surge in defaults on U.S. subprime mortgages made to borrowers with poor credit records and then securitized and sold to investment funds and banks throughout the world, thereby fueling the housing market in the U.S. with a large availability of credit. However, as the foreseeable losses on subprime mortgages mounted, institutions with large exposures had to write down more and more of their assets, eventually leading to the credit markets' seizing up. This situation turned a local subprime crisis into a global credit crunch as the worldwide financial crisis made banks reluctant to lend each other, which caused financial turmoil for banks reliant on short-term borrowing and, eventually, for countries and firms reliant on bank financing.
KeywordsReal Estate House Price Asset Price Real Estate Market Capital Asset Price Model
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