HousingReal Estate Bubble

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Housing/Real Estate Bubble

• It is characterized by rapid increases in the
  price of homes until they reach unsustainable
  levels relative to incomes and other economic
  elements.
• Bubbles are generally considered to have a
  negative impact on the economy because they tend
  to cause misallocation of resources.

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Timeline

• 2001 US Federal Reserve lowers Federal funds
  rate (interest rates) 11 times, from 6.5 to
  1.75.
• 2002 Annual home price appreciation of 10 or
  more in California, Florida, and most
  Northeastern states.
• 2004 U.S. homeownership rate peaked with an all
  time high of 69.2 percent.
• 20042005 Arizona, California, Florida, Hawaii,
  and Nevada record price increases in excess of
  25 per year.
• 2005 Boom ended August 2005. The booming housing
  market halted abruptly for many parts of the U.S.
  in late summer of 2005.
• 2006 Continued market slowdown. Prices are flat,
  home sales fall, resulting in inventory buildup.
  U.S. Home Construction Index is down over 40 as
  of mid-August 2006 compared to a year earlier.
• 2007 U.S. Treasury secretary calling the "the
  housing decline ... the most significant risk to
  our economy."

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Mortgage Crisis

• Banks / mortgage companies gave new and existing
  homeowners loans called Adjustable Rate
  Mortgages or ARMS.
• People took out the equity in the houses.
• When the interest rates went up, so did peoples
  house payment.
• Bubble was bursting and homes were loosing money.

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Mortgage Crisis

• People were no upside-down in home.
• Homes worth less than what they owe.
• Mortgage payments go up cant afford.
• Home goes into foreclosure.
• Also, many financial institutions were doing
  subprime lending
• Less room for financial difficulties of the
  borrower.
• Often leads to late payments and defaults.
• Given to people who did not meet traditional
  loan qualifications poor credit, no down
  payment high risk.

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Lehman Brothers

• Founded in 1850
• Global financial-services firm.
• The firm does business in investment banking and
  investment management.
• The firm's worldwide headquarters are in New
  York City, offices located throughout the world.
• More than 26,000 employees.
• On September 15, 2008, it filed for Chapter 11
  bankruptcy protection listing bank debt of 613
  billion.

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Bear Stearns

• One of the largest investment banks and
  brokerages firms in the country.
• March 2008 was bought by JPMorgan Chase with help
  from the US Government (Federal Reserve Bank of
  New York).
• Bear Stearns was given an emergency loan to in
  order to prevent the potential market crash.
• Government helped Bear Stearns signed a merger
  agreement with JP Morgan Chase for 2 a share.
• A staggering loss as its stock had once traded
  at 172 a share in January 2007.

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Bankruptcy

• A legally declared inability of an individual or
  organization to pay their creditors.
• Bankruptcy is usually voluntary and initiated by
  the individual or organization.
• There are six types of bankruptcy under the U.S.
  Bankruptcy Code
• Chapter 7 Basic liquidation for individuals
  and businesses.
• Chapter 9 Municipal bankruptcy.
• Chapter 11 Reorganization - used primarily by
  business.
• Chapter 12 Rehabilitation for farmers and
  fishermen.
• Chapter 13 Payment plan for individuals with a
  source of income.
• Chapter 15 Ancillary and other international
  cases.

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Stocks

• The stock market is the core of Americas
  economic system.
• Stock is a share of ownership in the assets and
  earnings of a company.
• Stock market is a general term used to describe
  all transactions involving the buying and selling
  of stocks and bonds issued by a company.

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Buying Stocks

• When a company would like to grow, it issues
  stocks to raise funds and pay for ongoing
  business activities
• It is popular because
• The company does not have to repay the money.
• Paying dividends is optional.
• Dividends are distributions of earnings paid to
  stockholders.

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Buying Stocks

• On average, stocks have a high rate of return,
  sometimes up to 12.
• Return means the increase or decrease in the
  original purchase price of stock.
• Higher rate of return greater risk.
• Stocks provide portfolio diversification

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What is a Portfolio?

• Money invested in a variety of investment tools.
• People investment for lots of reasons . . .
• Retirement (401k), wealth, income and fun.
• Holding a portfolio is part of an investment
  strategy called diversification.
• By owning several assets (diverse) certain types
  of risk can be reduced.
• Stocks, bonds, warrants, gold certificates, real
  estate, or any other item that is expected to
  retain its value.

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Broker/Brokerage Firms

• A stockbroker is a qualified and regulated
  professional who buys and sells shares and other
  securities on behalf of investors.
• A brokerage or a brokerage firm is a business
  that acts as a broker.

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Wall Street

• Wall Street is a street in lower Manhattan, NY.
• Wall Street was the first permanent home of the
  New York Stock Exchange.
• Major part of New Yorks financial district.
• Metaphor often used when referring to the stock
  markets or financial markets.

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Stock Exchanges

• Stock exchange is a corporation or organization
  which provides "trading" facilities for a stock
  brokers and traders, to trade stocks and other
  securities.
• New York Stock Exchange
• National Association of Security Dealers
  Automated Quotations (NASDAQ)
• Bombay Stock Exchange

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Stock Market Index

• Dow Jones Industrial Average (DOW)
• Lists the 30 most widely held public companies in
  the United States. Such as, McDonalds, Wal-Mart,
  Coca-Cola, Exxon-Mobile, Chevron.
• Standard and Poors 500 Composite Index
• Covers market activity for 500 stocks.
• More accurate than DOW because it evaluates a
  greater variety of stock.
• NASDAQ Composite
• Monitors fast moving technology companies.

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Stop Gaps

• Federal Deposit Insurance Corporation
• Provides deposit insurance which guarantees the
  safety of checking and savings deposits in member
  banks, up to 100,000 per depositor.
• The vast number of bank failures in the Great
  Depression spurred the US government to create an
  institution to guarantee deposits held by
  commercial banks.
• Stocks not covered!
• Securities Investor Protection Corporation (SIPC)
  -- a federally mandated corporation that protects
  investors from harm if a broker/dealer defaults.
  
• SIPC provides insurance coverage up to 500,000
  of the customer's net equity balance.