ESSAY SUBJECT MACROECONOMICS THEME REAL ESATE BUBBLE IN AMERICAN 2007 2008 LESSON FOR VIETNAM

However, in recent times, vietnam's vibrant real estate market right from the end of 2020 has created an unprecedented bustling scene in localities across the country, land prices are st

Ministry of Education & Training Foreign Trade University

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ESSAY SUBJECT: MACROECONOMICS

THEME:

REAL-ESATE BUBBLE IN AMERICAN 2007 - 2008

LESSON FOR VIETNAM

Ho Chi Minh City, July 6th, 2022

Major : Business Administration International Business

and Trade Teacher : Dr Phạm Văn Quỳnh

Table of Contents

TEAM 5 3

INTRODUCTION 4

PART 1: GENERAL REASONING ISSUES 6

1 Economic bubble phenomenon in general 6

2 The mechanism of the real estate bubble 7

3 A few points about the real estate bubble in Vietnam in recent years 8

PART 2: THE U.S REAL ESTATE BUBBLE FROM 2007 TO 2008 9

1 Causes of the real estate bubble in the US from 2007 to 2008 9

2 The evolution of the real estate bubble in the US from 2007 to 2008 11

3 Consequences of the U.S real estate bubble from 2007 to 2008 14

PART 3:VIETNAM'S REAL ESTATE MARKET IN 2007 - 2008 LESSONS LEARNED FOR VIETNAM AFTER THE REAL ESTATE BUBBLE IN THE US IN 2007 - 2008 17

1 The impact of the U.S real estate bubble on Vietnam 17

2 The situation of the bubble that created the fever in Vietnam's real estate market 18

3 The cause of Vietnam's real estate bubble 21

4 Lessons learned from the U.S real estate craze 23

5 Government's specific solution group 26

CONCLUSION 28

REFERENCE MATERIALS 29

The U.S economy is the largest in the world with powerful industrial development, modern agriculture and the center of trade and finance in the world Therefore, when the U.S economy changes, the entire world economy will be affected, directly

affecting the stability of many countries The most negative impact of the U.S

economy on the overall economy was followed by the Financial Crisis in the United States in 2007 The event quickly became an "Oil Spill", directly leading to the global economic crisis of 2008, pushing the world economy into a dark period, $10 trillion was washed away, 30 million people lost their jobs, 50 million people returned to the bottom of poverty and the collapse of one of america's largest investment banks , Lehman Brothers The most obvious, direct cause of this financial crisis is the

collapse of the real estate market When real estate mortgage lenders no longer care about customers' affordability and the loan-to-value ratio of homes reaches 99%, this makes home buyers more willing to leave the property when they are no longer able

to pay, leading to a rapid increase in the number of residential properties with debt forgiveness and reaching their children Millions, the real estate market freezes, the value of houses evaporates every day In addition, mortgage loans will be sold by lenders to investment banks These banks put their debts together into CDO's and sold them to the market The above series of jobs has caused the stagnation of capital flows, the "real estate bubble" bursting seriously affecting all sectors, causing serious damage to the world economy The world has paid a heavy price for the lesson of the

"American real estate bubble" However, in recent times, vietnam's vibrant real estate market right from the end of 2020 has created an unprecedented bustling scene in localities across the country, land prices are still rising rapidly, many experts are worried that the "real estate bubble" is broken due to the price being pushed up

quickly and at high levels can continue to continue As is the situation of 10 years ago, the risk of a future crisis persists, and certainly once it has happened, the scale can only be greater, not reduced Therefore, it is necessary to review the lessons of the past, draw experiences to have solutions to prevent and respond to bad cases

Seeing the importance of the above work, the team chose to study the topic "Us real

estate bubble in 2007-2008 and lessons for Vietnam.

Part 1: General overview of the state of the "real estate bubble"

Part 2: US real estate bubble in 2007 - 2008

Part 3: The state of Vietnam's real estate market in 2007 - 2008

Lessons learned for Vietnam after the real estate bubble in the US in 2007 - 2008

In the essay, the team focused on making the "real estate bubble" and analyzing the development, causes and consequences of this problem, the extent to which the "burst bubble" caused the crisis for the economy and the world, thereby related to the fever in vietnam's real estate market, whether there is an impact from the crisis in Vietnam with the real estate market in Vietnam or not Finally,

some lessons are learned and recommended solutions

PART 1: GENERAL REASONING ISSUES

Recently we often hear the press mentioning phenomena such as: "stock bubble", "real estate bubble" In fact, there have been many economic bubbles in the world The South Sea Company (1720), the Great Depression (1929-1933), the Japanese Economic Bubble (1980s), the Dotcom Bubble (1995-2000), the Poseidon Bubble (1970) So why do people call the horrors that have been happening to the name above? Economic bubbles can be understood as follows: Economic bubbles are the manifestation of a characteristic economic cycle, after a period of time the market is depressed will quickly expand The economic bubble will be manifested

by the fact that the price of the asset increases and goes beyond the safe limits of the underlying financial coefficients This phenomenon only occurs in certain economic sectors After the phenomenon of sudden price increase will be the phenomenon of rapid and sharp price declines leading to massive selling The economic bubble is a theory that describes the phenomenon of rising stock prices beyond its core value, the price continues to escalate to a certain extent, then stops and falls freely without stopping and falling freely without a stop and is called a "bubble burst" It can be summarized about the economic bubble is the sudden increase in the price of a product or economic sector in a certain period of time causing the phenomenon of

"fever" Many people are fooled with this virtual price and after the price has risen

at a certain level, it is called an economic bubble phenomenon Then the price suddenly overlaps and falls uncontrollably, it is called a "bubble burst" Economists associate the concept of bubbles with collapse The explanation for this relationship

is that once the bubble has burst, investors who own stocks will try to sell quickly, selling massively just to recover money without losing money While the demand for selling is extremely large, the demand for acquisitions is extremely small,

leading to serious losses After the panic sold in a massive, the economic market went down rapidly and collapsed, affecting everyone and leading to an economic

recession Thus it can be understood that when a bubble bursts the economic market there is a great risk of collapse

The mechanism of the real estate bubble is often explained by a theory called the "Greater Fool Theory" The theory of behavioral psychology argues that there are always "idiots" in the market who are willing to buy overvalued goods without regard to quality He expects to sell it to another greedy speculator who is "the dumber." The ball is becoming more and more bulging when there are other "idiots" who bring with them the purpose of profiting quickly And when the bubble bursts, there are no more "fools" because no one else will buy that commodity at the

highest price In the real estate market, there are more "idiots" pouring money into the land due to pushing the virtual price too high compared to the real value of real estate for the purpose of profiteering, making quick profits, stimulating the

psychology of surfing investment Vietnam's economy with GDP growth exceeds the threshold, leading many individuals and businesses to want to participate in investment In particular, real estate is a very popular investment channel, which can

be used as assets for storage, transmission, business, including speculation Some commercial banks have very high credit growth due to lending at subprime interest rates At the same time, instead of controlling credit loans, commercial banks let loose, creating conditions for loans to misuse The appearance of many brokers, investors in secondary real estate business, "stork land" has caused real estate prices

to skyrocket with dizzying frequency The competent authorities do not timely use tools on taxes, planning, credit, land use plans, urban development so that the

regulation of the market does not result in a bubble that balloons to one day will burst Economists see the economic bubble, especially the real estate bubble, as a phenomenon that has a negative impact on the economy, because it represents the instability of the economy When the bubble bursts, it can damage a huge amount of wealth while also being accompanied by a prolonged period of economic

uncertainty The consequences not only devastate a country's economy, but its influence can sometimes spread beyond its borders

recent years

Back in recent years, along with strong economic growth in Vietnam, the real estate market retained its attraction in the land fever on a large scale Land property prices in many areas are racing to skyrocket Shows unusual signs of a growing real estate bubble People flocked to real estate, despite the epidemic, despite rising prices day by day Vietnam's real estate market, which has been around for more than 30 years, is a very young market Vietnam as a country is increasingly deeply integrated and the world economy will certainly not be inevitable if the crisis caused

by the real estate bubble from other countries affects Reducing the bubble's rise is essential Currently, the Government has controlled credit into real estate very well, investors borrow to buy real estate is not simple, deposit interest rates are low, lending interest rates are not negative The market is more mature than before Buyers are also wiser and the information is more transparent That's why Matthew Powell, director of Savills Hanoi, said he doesn't believe in the real estate bubble theory "We are confident that Vietnam's real estate market has maintained a steady growth rate The real estate bubble is created by uncontrolled lending and

speculation activities This growth is not at a dangerous or out-of-control level, but entirely in a safe zone."

PART 2: THE U.S REAL ESTATE BUBBLE FROM

Subprime housing mortgage is one of the subprime housing mortgages that is one of substandard loan and especially thrives in the early 21st century, becoming an American industry This means that the form of real estate mortgage is a profitable type of business not only with the lending bank but also with the real estate speculator Most banks and credit institutions lending in this form accept collateralized assets formed from loans, which can see that the risk is very high because its object is real estate – capital often falls and the cycle is frozen

1.2 Causes

The real estate bubble was determined to be caused by commercial banks lending

"substandard" home loans on a large scale The large number of people flocking to bank loans (paying interest and capital for a long time) is due to the low-interest rate and ease

of borrowing in the US that the Us Federal Reserve (FED) implemented to encourage production and consumption, saving the US economy from recession after the crisis of

2000 - 2001 (only 9 from May 2001 to 2001) In December 2002, the Fed cut the lending rate 11 times from 6.5% to 1.75% per year Between 2004 and 2006, subprime mortgage lending accounted for 21 percent of all mortgage loans, up 9 percent from 1996 to 2004,

with the total value of subprime mortgages reaching $600 billion in 2006 alone, a fifth

of the U.S home loan market

a The change in the policy rate in the United States (blue line).

Housing market activity has been buoyant thanks to rising personal incomes, low mortgage lending rates, and abundant credit This has made all market participants want

to take advantage of the profit People rush to buy houses to make a profit because firstly they believe that house prices will rise higher, secondly during this period, buying

a house in the US is quite easy, buyers only need to immediately tea 20% of the value

of the house, the rest will pay in installments within 20 years or longer The interest rate

at that time was very low, so just buy than rent to pay the bank interest, when the price

is sold to make a profit According to statistics, in 2005, up to 28% of the homes purchased were for speculative purposes and 12% were bought just to zero Homebuyers don't feel the risk because the constant rise in house prices allows them to repay their debts very easily by borrowing more

Lenders feel safe because the risk of default is decreasing over time as house prices continue to rise The property value of homeowners also increased accordingly Commercial banks can lend to people with "substandard" home loans on a large scale due to the investment of financial companies and banks, especially Fannie Mae and Freddie Mac, which the US government sponsors "financing" by acquiring loans from Commercial Banks, complications into documents secured by mortgage loans to sell to other large companies and investment banks such as Bear Stearns, Merrill Lynch These financial companies and investment banks issue bonds on the basis of such

mortgage loan documents to sell to other U.S banks and banks in many countries around the world as hoarding assets due to the reputation of the issuing banks The

"securitization" of mortgage loans has spiraled out of state control The chain of speculative business activities has caused the housing market to heat up, housing prices have been pushed up, becoming a "bubble" "Bubbles" explosions are inevitable

b Changes in house prices during the housing market bubble

In early 2006, as interest rates continued to rise, home loan debt suddenly skyrocketed Many people lose the ability to pay when selling their homes is not as easy as before because the U.S real estate market is frozen, and the demand for American people's homes has dropped sharply along with the rapid decline of housing prices Debt is hard

to ask for The growing number of bad debts and customers defaulting puts U.S banks and credit institutions at risk of frightening losses Moreover, these bad mortgage loans are securitized into coupon muscles, split up, and traded on the stock market Therefore, the home loan crisis only occurs in the US, living affecting the impact is spreading as far as New Zealand, Germany, France, Australia, and Japan Because they are also involved in the sale of securities of this type

Thus, the explosion of the bubble in the U.S in late 2007 and early 2008 stemmed from banks' slight reduction of lending standards for loans to buy homes for housing speculators, and their tendency to securitize those loans caused that crisis to spread to some countries Europe and Asia

2 The evolution of the real estate bubble in the US from 2007 to

2008

The U.S housing market has been in a bubble since 2001 Americans actively borrowed

to buy houses even though interest rates on loans were pushed very high in 2004-2005 When the economic situation is difficult, house prices fall sharply From the end of

2005, the housing bubble began to flatten

In 2001 marked the formation of a housing bubble in the U.S market after the Federal Reserve cut interest rates 11 times from 6.5% to 1.75% to revive the U.S economy that was on the decline after the collapse of the Dot-Com industry It makes the real estate market extremely exciting

U.S home prices rose continuously between 2000 and 2005 In just five years, the sales

of newly built homes increased by 41.14% (from 907,907 units per month to 1,283,000 units per month) In 2000, the average price of a home in use was $139,000, but by 2001

it had reached $139,700 and tended to rise until 2005 House prices rose continuously from 2001 until 2005 at a rapid pace of $219,600 in 2005 for existing homes and reached

a record level in the second quarter of 2005 The median price of homes in use nationwide in April 2005 was $206,000, up 15.1 percent from April 2004 when the median price stood at $179,000 This is the biggest price increase since November 1980, when house prices rose 15.6% year on year Depending on the region, there are different price increases, with prices rising the highest in the West with $305,000 for a home in use or 21%

2005 was also the year that house prices in the central region's states rose to record levels In the first quarter of 2005, Florida led the nation as a whole in the rate of house price growth In Bradenton, the median home price was $275,100 (up 45.6% from the same period in 2004), followed by Sarasota with $326,300 (up 36%) and the West Palm Beach area - Boca Raton - Delray Beach with $362,800 (up 35.9%) Arizona, California, and Hawaii also hit record prices, up 25 percent from 2004 Trading volume also increases rapidly during this period The volume of transactions for used and newly built houses on the market increased by 2,102,000 units per month from 2001 to 2005 (equivalent to 33.86%) In 2004 it set a record for the highest number of homeowners

at 69.2% However, since the fourth quarter of 2005, the market has shown signs of slowing down In 2006, while the price of houses and land in many countries increased, the real estate market in the US was quite quiet The number of new homes built in February 2006 decreased by 4% compared to January, from 882,000 units to 848,000 units, the biggest decline in six years

In 2007, house prices and the number of transactions on the market continued to decline, from 1,283,000 units to 776,000 units According to the North American Organization

of Realtors, the number of transactions in use is 4,910,000 Between August 2007 and the end of August 2008, more than 770,000 U.S homes were saddled with bank debt because families couldn't afford to pay their mortgages Individuals have difficulty repaying debts Many home loan credit institutions have difficulty recovering their

debts When the economy is not working effectively, rising interest rates create a burden

of repayment for low-income people, unemployment increases, and the risk of prepared loans affects the fastest

under-Unable to pay the debt, a series of home buyers were foreclosed on and assets were sold Cleveland (Ohio) was the first city to spark a crisis that spread across the United States and the world According to statistics, about one in 10 homes in Cleveland have been repossessed for commercial use Immigrants with dreams of buying a home are back empty-handed U.S home prices fell dramatically in the third quarter of 2007, the worst level since the 1930 financial crisis

Some U.S credit institutions, such as New Century Financial Corporation, have declared bankruptcy Others have fallen sharply in their shares, such as Countrywide Financial Corporation Many depositors at these credit institutions were scared and came to withdraw money, making it even more difficult for those institutions The risk

of credit scarcity forms In 2008, the U.S government allocated more than $900 billion

in special loans and rescues related to the U.S housing bubble More than half supported two government mortgage companies, Fannie Mae and Freddie Mac, and the Federal Housing Administration Also in 2008, the "Bad Property Rescue" Program was born Specifically, the Government's support package proposes a new loan level with an interest rate of only 4%, an extension of the loan term to 40 years, and an additional grace for unpaid overdue loans

In response to the 2008 global financial crisis, the U.S Federal Reserve implemented a policy of interest rates near zero The Fed's goal is to commit to keeping short-term interest rates near zero until 2015 to stimulate lending and save businesses and the economy Then, to revive the economy, the Fed continued to intervene in the financial and monetary markets with 3 quantitative easings (QE) packages in 2008, 2010, and

2012, respectively These are the bailouts the Fed has put in place to rescue U.S financial markets amid rising unemployment and low GDP growth

After a series of measures taken by the Government and the Fed to handle the real estate crisis, the U.S real estate market has shown signs of recovery In 2013, the U.S housing market showed signs of recovery at a strong pace The S&P/Case-Shiller Composite Index of Home Prices released on June 25, 2013, shows that home prices in 20 US cities

increased by more than 2.5% in April compared to March, the largest increase the highest month since 2000…

3 Consequences of the U.S real estate bubble from 2007 to 2008

The housing bubble affects not only the real estate market but also the surrounding areas, personal property, and the economy as a whole The bubble causes insolvency, leading many to look to unprofitable mortgage programs It can cause homeowners to change their retirement plans, meaning they'll have to work longer just to pay the bills After the housing bubble burst, it's not uncommon for people to lose their homes or savings Between 2001 and 2006, employment in the residential construction sector increased

by 29.1%, significantly faster than the 12.7% increase in the entire construction sector

In contrast, between 2006 and 2009, employment in nonfarm payrolls in residential construction decreased by 36.6%, while employment in the entire construction sector decreased by 21.5%

Changes in employment in non-agricultural payrolls, some select industries 2001 - 2009

The impact of the housing bubble is not limited to the construction sector Between

2001 and 2006, employment in cement and concrete products and construction machinery increased by 5.1% and 9.0%, respectively Employment in the real estate credit industry and mortgage and non-mortgage lending brokerage increased by 52.0% and 119.5%, respectively

As the housing bubble collapsed, industries heavily dependent on demand from residential construction began to suffer significant job losses Between 2006 and 2009, employment in mortgage and non-mortgage lenders and in real estate credit fell by 54.5% and 44.0%, respectively Wood products (-35%) and cement and concrete products (-24.4%) also lost their jobs

It was one of the causes of the 2007-2009 U.S financial crisis As soon as the housing bubble burst in late 2005, the U.S economy began to slow down However, the bursting bubble has led to unpayable loans by housing investors to financial institutions in the country In mid-2007, the first U.S financial institutions involved in secondary housing credit went bankrupt U.S stock prices are starting to fall The financial collapse culminated in October 2008 when even giant and long-standing banks had survived previous financial and economic crises, such as Lehman Brothers, Morgan Stanley, Citigroup, and AIG, Also in distress The emergence of credit hunger has left the U.S economic sector in a difficult position, such as the 2008-2010 U.S auto industry crisis (Many Americans invested in housing to speculate on not being able to sell their homes and falling into bank debt Through the property effect, the consumption in general and the consumption of automobiles on their own decreases)

The Dow Jones Industrial Average (DJIA) - an index that calculates the value of the 30 largest companies and most shareholders in the US, as of the close of March 9, 2009, was 6,547.05, the lowest level since April 1997 Within 6 weeks, the index dropped 20%

Many financial institutions from developed countries, especially those in Europe, also participate in the secondary housing credit market in the United States Therefore, the bursting of the US housing bubble also exposes these financial institutions to the same danger as US financial institutions The European countries with the most financial turmoil were the UK, Iceland, Ireland, Belgium, and Spain