Sociology 3357F/G Lecture Notes - Refinancing

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Lecture Six November 7, 2013
The Great Recession
The “. com” bust
Dot com bust
Nasdaq hits 5,000 + on in march of 2000
5 years back, it was well under 1000
What is normal market appreciation?
People get the taste of “quick money” in their mouth
The Interest Rate Story
May 2000: federal funds rate is 6.5 basis points
US economy decelerating
September 11, 2001: exacerbates the situation
Extremely low rates for a long time
July 2003: federal funds rate at 1%
And stays there until about 2004, interest rates were steadily at 1%
Meanwhile… housewarming parties were being held more and more meaning that people
were buying new houses
The math
X + Y + Z = Q
Where:
oX = low interest rates
oY= more affordable housing
oZ= people who potentially lie about their occupational status and those who get
paid in relation to the amount of loans they originate
oQ= a really big mess
When interest rates are low, mortgages are lower, leads to more affordable housing which
means people who normally couldn’t afford these houses were able to buy them
Wikimeltdownopedia
Lower rates, more affordable housing
ARM’s, teaser rates, liar loans
Refinancing
When rate adjusts, refinance
HELOC’s as ATMs
oHome equity line of credit
oBorrowing money on the back of the equity from your home
oA lot of people were using their home equity lines of credit as ATMs
Bubble to bubble…
“Once stocks fell, real estate became the primary outlet for the speculative frenzy that the
stock market had unleashed. Where else could plungers apply their newly acquired
trading talents? The materialistic display of the big house also has become a salve to
bruised egos of disappointed stock investors. These days, the only thing that comes close
to real estate as a national obsession is poker. ”
Biggest assumption that lead to the meltdown
Home prices will always go up
Economy starts doing better
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