The US Housing Market and the Subprime Mortgage Crisis (A)

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Case Details:

Case Code : BENV014
Case Length : 21 Pages
Period : 2001-2007
Pub Date : 2008
Teaching Note :Not Available
Organization : -
Industry : Financial Services
Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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“If there is a fault line in the global financial system, it runs through the U.S. mortgage market.”¹

- Mark Zandi, Chief Economist, Moody's Economy.com², in March 2007.

“It's a self-perpetuating spiral: as subprime companies tighten lending they create even more defaults.”³

- Peter Schiff, Head of Euro Pacific Capital⁴, in February 2007.

Introduction

In April 2007, the National Association of Realtors⁵ reported that existing-house sales in the United States (US) fell by 8.4 percent in March 2007, the biggest percentage decline in the previous 18 years. According to the report, sales fell by 10.9 percent in the Midwest, by 9.1 percent in the West, by 8.2 percent in the Northeast and by 6.2 percent in the South. This decline led to a fall in house prices. In March 2007, the average price of a house was US $217,000,⁶ a 0.3 percent decline from the price in March 2006. “The number of homeowners trying to unload their properties is still so ridiculously high that pressures on prices will likely continue,” said Joel Naroff, Chief Economist at Naroff Economic Advisors⁷.⁸

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1] Ellen Florian Kratz, “The Risk in Subprime,” www.money.cnn.com, March 1, 2007.

2] Moody's Economy.com, a subsidiary of Moody's Corporation, is an independent provider of economic analysis, data, and forecasting and credit risk services. (Source: www.economy.com)

3] Ambrose Evans-Pritchard, “US Mortgage Crisis Goes into Meltdown,” www.telegraph.co.uk, February 24, 2007.

4] Euro Pacific Capital was founded in 1980 and is headquartered in Darien, Connecticut. It is a full service, NASD-registered broker/dealer that is recognized for its expertise in foreign markets and securities. (Source: www.europac.net)

5] National Association of Realtors (NAR) is one of the largest trade organizations in North America. It was founded on May 12, 1908 as National Association of Real Estate Exchanges. It was renamed in 1974. The members of the NAR include brokers, salespersons, property managers, appraisers, counselors and others engaged in the real estate market. (Source: http://en.wikipedia.org)

6] Dollar ($) refers to US $ in this case study.

7] Naroff Economic Advisors is a consulting firm that advises corporations and financial institutions on the risks and opportunities of economic developments. (Source: http://www.naroffeconomics.com)

8] “Existing Home Sales Tumble in March,” http://www.msnbc.msn.com, April 24, 2007.

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