A Mutual Fund Sell order in 2000 lead to home Foreclosures eight years later.
Economics is all about connections and chain of events. An economic "system" is subject to a whole range of pressures and an action in one component can have long lasting implications on sectors seemingly unconnected. A computer sell order on March 10, 2000 was one of these actions.
In March 2000 the stock market was riding high and the Internet Bubble was not yet seen as a bubble, just a long upward progression to prosperity. On Friday, March 10, 2000 stock market monitoring computers for large mutual funds triggered a sale of three tech companies, IBM, Cisco, and Dell. On Monday, March 13 the stock market began a steady decline that turned into a collapse for the tech-laden NASDAQ. It is estimated that $5 trillion in stock value was lost in the two years following March, 2000. In fact, this money was not lost. It was simply transferred away from the stock market. In 2001 the Federal Reserve began an interest rate lowering process that would provide an incentive to put all this money in another area of the economy. The historically low interest rates provided a strong incentive to borrow and the trillions of dollars no longer in the stock market gravitated toward lending institutions.
With trillions of almost free dollars available, the lending industry went crazy trying to get as much capital into mortgages as possible. Cheap mortgages provided a huge incentive for individuals to buy property and this buying frenzy caused the property values to skyrocket. In some regions values jumped by more than 50%. By 2005 most of the people that could afford these properties already owned property. However; there was still plenty of money available for loans so lenders began to expand their marketing the less financially stable. By 2007 all the money from the 2000 stock market withdrawal was into mortgages plus additional trillions.
Naturally, these less than secure borrowers began to face the reality of monthly mortgage payments higher than they could actually afford. By August 2007 the housing market began to decline and those mortgage payments were for homes whose value was no longer equal to outstanding loan. With zero or even negative equity coupled with unaffordable payments the smart thing is to walk away from the loan. This is exactly what began to happen.
The primary difference between the stock bubble in 2000 and the housing bubble in 2003-2007 is that when the stock bubble burst individuals lost money but the money was still there, just in other people's hands. With the housing bubble trillions were leveraged against artificially inflated home value, or paper money. When this is lost it doesn't get transferred to someone else's. It's lost for good. Maybe the bubble connection has been broken for awhile.
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