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Homework answers / question archive / Currently the US housing market experiences a substantial slow down and faces many challenges
Currently the US housing market experiences a substantial slow down and faces many challenges. A major contributing factor is the crisis in mortgage market. Due to previous deregulations and lack of oversight, the mortgage lenders adopted highly risky practices. Financial institutions took inappropriate risks in their investments and at the same time wrote their loan contracts with many unfriendly clauses. The borrowers and investors, meanwhile, did not fully understand these contracts and practices and entered into these associations and agreements without proper information. Consequently, with a slowdown in the real estate market and the general economy, the mortgage market collapsed and caused further downfall in the real estate market. Many borrowers were not able to meet their mortgage payments and the wave of foreclosures emerged. Homeowners neglected and left the properties they could no longer pay for and the vacant and rundown foreclosed properties in various neighborhoods, not only became eye sores, but also turned into magnets for criminals and crime. Accordingly, the property values and quality of life in these areas took a severe hit.
Obviously, the mortgage and real estate markets have not produced efficient outcomes here. Name and explain the two main categories of market failure that are evident in this situation?
The two main categories of the market failure evident in the given situation are:
1. Cyclical Instability: This kind of market failure arises when the economy enters a recession or experiences boom. In the given situation, the housing sector is suffering from a substantial slowdown and thus leads to an inefficient allocation of resources.
2. Information Failure: Imperfect information in the market leads to inefficiency in resource allocation. In the given situation, the borrowers and investors are negligent towards the contract terms and it thus led to market inefficiency.
