The Economy of Bankruptcy
Every market has its buyers and sellers. Some parties profit which some other parties acquire losses. The same is true of the foreclosure crisis. During the past two years, almost every city in the United States experienced the ironic and joyful nature of the real estate world.
In turn, this helped to form market equilibrium where supply and demand exchanged patterns giving rise to a new economic wave with foreclosure acting as the inner motor. In order for any market to operate, two main mechanisms must exist: supply and demand. Supply refers to availability of products, while demand refers to consumers purchasing the available products.
In the foreclosure market, the product is mainly devalued real properties. In addition, devalued banking assets became also steadily available. Potential property buyers, including individuals and investors, comprise majority of consumers demanding such product. Recently, NAR – National Association of Realtors – announced a 24% increase in property purchases.
Moreover, many commercial banks bought devalued banking assets from failed investment firms. For example, Bank of America acquired Lehman Brothers for pennies on the dollar. Supply and demand within any market yields profit and loss. Starting with loss, the upcoming middle class and blue collar working class were the primary losers. Most of the foreclosed properties were funded through risky investments in the form of subprime lending practices.
In turn, banks and lending institutions, which supplied subprime loans, found their assets devalued by rating companies and lowered investors’ confidence. In the profit corner, traditional buyers profited the most. Potential buyers, who enjoy good credit and had saved enough of a down payment, are able to acquire real properties at almost 50% discount in comparison with real property values from 2005. Moreover, consumer banking in the United States became stronger as risky banks flunked under economic stresses.
Furthermore, consequences of a market fueled by foreclosure can be divided into economical, social and political spheres. First, the economical sphere carries consequences of failed economic policies. The United States government bailed out over 100 financial institutions, in addition to a number of bail out policies directed towards failed industries, through public funds. Most of those public funds are collected from current tax-payers’ pay check. Second, the social sphere as many cities are forced to cut services due to loss of income from taxation of properties and regulatory fees associated with real estate transaction.
And third, the political sphere was demonstrated during the 2008 Presidential and Congressional elections. Both Democratic and Republican politicians had manipulated the foreclosure crisis to gain votes and attack the other side. Finally, the crisis of foreclosure is part of the American real estate market cycle. In 1989, a similar foreclosure crisis existed, where Saving and Loan financial institutions were over burdened with bad real estate mortgage loans.
But, Americans must learn from every crisis in order to develop strategies to deal with future problems. As with any market, the foreclosure crisis created its own economy. Better regulations of both the supply and demand of the real estate market can limit the affects of such economic downfalls. At the end, life experiences are the road map for future stability. For more detail information visit us: Loan Modification or Stop Foreclosure
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