The early part of the 2000s was a godsend for many consumers. Credit was flowing with relative ease, making it nearly impossible to be declined for a loan, credit card, or a mortgage. Subprime loans were rampant, not only giving investors and corporations big profits, but they also helped many people live out the American dream by letting them become homeowners. While they were a blessing for many people, the financial evils of that period helped trigger the mortgage crisis and the Great Recession. As a nation, we've certainly had to pay for our indiscretions and the aftereffects of the crisis will be with us well into the future. Here are five consequences that came out of the subprime mortgage crisis.
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- Once-prosperous suburban areas saw a rise in vacancies, with entire neighborhoods in complete disrepair.
- Many homeowners are still under threat of foreclosure.
- Unemployment rates have dropped, but economists predict they'll rise by 2030.
- Credit hasn't flowed as easily as it did during the period before the subprime mortgage meltdown.
- Almost half of Americans say they expect to live paycheck-to-paycheck.
The Subprime Crisis: An Overview
Just before the subprime mortgage meltdown, the economy was on the verge of a recession because of the tech bubble. Companies in this sector saw a sharp increase in their valuations and investment in the industry was also very lofty. In response to this, central bank authorities tried to stimulate the global economy by cutting interest rates. As a result, investors who were hungry for higher returns began turning to riskier investments.
Lenders did too, as they started approving mortgages to people with poor credit scores. Some of these people also had no income and no assets. Lenders repackaged these loans into special investment vehicles—mortgage-backed securities (MBSs)—and sold them to investors. But as demand heightened, the housing bubble ended up collapsing, wreaking havoc over the entire global economy.
The Rise of the Slumburb
The crisis spurred an avalanche of home foreclosures that left large sections of once-prosperous suburban neighborhoods vacant and in disrepair. The suburbs also saw a sharp rise in poverty which, according to the Brookings Institution, housed roughly one-third of the nation's population living below the poverty line.
This phenomenon is perhaps most noticeable in and around Midwestern cities such as Grand Rapids, Michigan, and Youngstown, Ohio. The shift from calm suburbia to troubled neighborhoods was a result of a combination of factors including the housing bubble and rampant foreclosures, along with immigration, changes in the workforce—income levels and higher unemployment—as well as a spike in the population.
Recovery hasn't been easy. The effects are still lingering in certain parts of the United States including the Rust Belt—even in cities in California. Large communities are still seeing high vacancy rates, with a lot of people unemployed and living below the poverty line. Michigan's unemployment rate, for instance, was 4.1% in October 2019, above the national rate of 3.6%.
The Ongoing Foreclosure Mess
Besides putting people in the position of having to find somewhere else to live, the Federal Reserve asserts that foreclosure can damage the prospects of a comfortable retirement because a home is the main asset for millions of Americans. This is, of course, in addition to the damage a foreclosure can do to a homeowner's credit score.
The wave of foreclosures that accompanied the economic meltdown was just the start. Although the numbers aren't what they were following the subprime crisis, people continue to lose their homes—with no end in sight. There were roughly 300,000 foreclosures recorded in the first half of 2019, according to a report from MarketWatch. At the local level, foreclosure starts jumped in 42% of the country's local markets.
The national unemployment rate hovered near the 10%-mark following the subprime mortgage meltdown but has been trending downward since then. As of January 2020, the nation's unemployment rate was reported at 3.6%, according to the Bureau of Labor Statistics (BLS). But the unemployment rate in some states is still trending higher than the national average. At the end of January 2020, Alaska's rate was 6.1%, D.C.'s rate was 5.3%, while Mississippi's rate was 5.7%.
But the national unemployment rate is expected to rise by as much as a full percent by 2030. Although it doesn't seem like much, local and state unemployment could also see a jump as well.
Unemployment is expected to rise by 2030.
Like low unemployment, quick home loan approvals, and unfettered access to credit are things of the past. Whereas just about anybody could get a credit card or be approved for a mortgage before the economy cratered, even those considered well-qualified borrowers can have a hard time getting approved. By some estimates, only one out of 10 applications for a home loan were approved following the market crash.
Tougher Time Making Ends Meet
There's no doubt about it. Things are tougher in general since the crisis hit, especially for the middle class. In fact, 49% of Americans surveyed by the First National Bank of Omaha said they'll probably live paycheck-to-paycheck in 2020, according to a report from Yahoo Finance. More than half of those surveyed don't have enough saved to cover more than three months' worth of expenses.
The Bottom Line
Despite the grim picture this presents, it's not all bad. Interest rates are at record lows, saving a lot of money on interest for those who can get loans. And inflation hasn't played a major role in the past year and therefore hasn't been eroding the value of our money. Moreover, economists say the economy is headed in the right direction with growth predicted until about 2029.