01February 2007: Homes Sales Peak
In February 2007, at an annual rate of 5.79 million. Prices had been declining since July 2006 when they hit $230,400. In January 2007, at $254,400.
As each month brought more bad news about the housing market, economists didn't agree on how bad it was. Definitions of recession, bear market, and a stock market correction are well standardized, but the same is not true for the housing market.
that housing price declines of 10 to 15 percent were enough to eliminate equity. It creates a snowball effect that eventually creates severe pain for homeowners.
Analysts believed that home prices probably wouldn't fall as far. They thought homeowners would take their homes off the market before selling at such a loss. Furthermore, mortgage rates were "only" around 6 percent, only half the rate they were in the 1980 recession. The Fed promised to further lower rates, keeping needed liquidity in the mortgage market. Economists thought that would be enough to allow mortgage holders to refinance, reducing foreclosures.
02March 2, 2007: Fed's Bernanke, Poole Counter Greenspan Recession Warning
On March 2, 2007, Federal Reserve Bank of St. Louis that the U.S. economy was forecast to grow 3 percent in 2007. A recession is when two consecutive quarters of negative gross domestic product growth occur.
Poole’s comment seemed to counter former Federal Reserve Chairman that a recession was possible later in 2007. Greenspan's comment, made on February 26, triggered a widespread stock market sell-off on February 27. Greenspan also mentioned that the U.S. budget deficit was a significant concern.
Poole’s comment reiterated Fed Chairman to the House Budget Committee on February 28. It reassured markets that the United States would continue to benefit from another year of its Goldilocks economy.
Poole added that he saw no reason for the stock market to decline much beyond current levels. He said stock prices were not overvalued as they were before the 2000 decline.
03March 6, 2007: Stock Market Rebounds After Worst Week in Years
On March 6, 2007, stock markets rebounded.
- Dow Jones Industrial Average - up 157 points or 1.3 percent, after dropping more than 600 points from its all-time high of 12,786 on February 20.
- Standard & Poor’s 500 - up 21 points or 1.5 percent, after falling 80 points from its high of 1,453 on February 15.
- NASDAQ - up 44 points or 1.9 percent, percent after losing 7 percent since its high of 2,524 on February 22.
Did that mean everything was okay with the U.S. economy? Not necessarily. For one thing, the stock market reflects investors' beliefs about the future value of corporate earnings. If investors think earnings will go up, they will pay more for a share of stock. A share of stock is a piece of that corporation. Corporate earnings depend on the overall U.S. economy. The stock market then is an indicator of investors’ beliefs about the state of the economy. Some experts say the stock market is actually a leading indicator of about six months out.
The stock market is also dependent on investors’ beliefs about other investment alternatives, including foreign stock exchanges. In this case, the sudden 8.4 percent drop in China’s Shanghai index caused a global panic, as investors sought to cover their losses. A big cause of sudden market swings is the unknown effects of derivatives. These allow speculators to borrow money to buy and sell large amounts of stocks. Thanks to these speculators, markets can decline suddenly.
For these reasons, sudden swings in the U.S. stock market can occur that are no reflection on the U.S. economy. In fact, the market upswing occurred despite several reports that indicated the than expected.
By March 2007, the housing slump was spreading to the financial industry. Business Week reported that hedge funds had invested an unknown amount in mortgage-backed securities. Unlike mutual funds, the Securities and Exchange Commission didn’t regulate hedge funds. No one knew how many derivatives or .
Since hedge funds use sophisticated derivatives, the impact of the downturn was magnified. Derivatives allowed hedge funds to essentially borrow money to make investments, creating higher returns in a good market, and greater losses in a bad one. In response, the Dow Jones Industrial Average plummeted 2 percent on Tuesday, the second largest drop in two years. The those subprime lenders’ miseries.
On April 11, 2007, the Federal Reserve released the minutes of the March Federal Open Market Committee meeting. The stock market dropped 90 points in disapproval. Worried investors had hoped for a decrease in the fed funds rate at that meeting.
Instead, the Fed was worried more about inflation. It ruled out a return to expansionary monetary policy anytime soon. Lower interest rates were needed to spur homeowners into buying homes. The housing slump was slowing the U.S. economy.
06April 17, 2007: Help for Homeowners Not Enough
On April 17, 2007, the Federal Reserve announced that the federal financial regulatory agencies that oversee lenders encourage them to work with lenders to , rather than foreclose. Alternatives to foreclosure include converting the loan to a fixed-rate mortgage and receiving credit counseling through the . Banks that work with borrowers in low-income areas can also receive Community Reinvestment Act benefits.
In addition, Fannie Mae and Freddie Mac committed to helping subprime mortgage holders keep their home. They launched to help defaulters and possible ones keep afloat. Fannie Mae developed a new effort called “HomeStay." Freddie modified its program called "HomePossible." It gave borrowers ways to get out from under adjustable-rate loans before interest rates reset at a higher level, making monthly payments unaffordable. But, these programs didn't help homeowners who were underwater. In other words, most of them.
07April 26, 2007: Durable Goods Orders Forecast Recession
The business press and the stock market celebrated a 3.4 percent increase in durable goods orders. This was better than the 2.4 percent increase in February and much better than the 8.8 percent decline in January. Wall Street celebrated because it looked like businesses were spending more on business orders for machinery, computer equipment, and the like. These expenditures increased 3.4 percent. This meant they were getting more confident in the economy.
The year-over-year changes told a very different story. When compared to 2006, March durable goods orders actually declined by 2 percent. This was worse than February's year-over-year decline of 0.4 percent and January's increase of 2 percent. In fact, this softening trend in durable goods orders had been going on since last April.
Why are durable goods orders so important? Well, since they represent the orders for big-ticket items, businesses will hold off making the purchases if they aren't confident in the economy. Furthermore, declining orders mean declining production. And that means a decline in GDP growth. That's why the durable goods orders report is considered a leading indicator.
08June 19, 2007: Home Sales Forecast Revised Down
The National Association of Realtors forecasted that home sales were projected to total 6.18 million in 2007 and 6.41 million in 2008. That was lower than the 6.48 million sold in 2006. It was lower than May's forecast of 6.3 million sales in 2007 and 6.5 million sales in 2008.
The NAR also forecasted the national median existing-home price to decline by 1.3 percent to $219,100 in 2007 before rising 1.7 percent in 2008. That was better than May's forecast of a low of $213,400 in the first quarter of 2008. It was still down from the high of $226,800 in the second quarter of 2006.
In a dramatic action, the FOMC voted to lower the benchmark fed funds rate a half point down from 5.25 percent. This was a bold move, since the Fed only adjusts the rate by a quarter point at a time. It was meant to signal that the Fed would be aggressive in its expansive monetary policy to support the shaky financial system. It lowered the rate four times until it reached 4.25 percent in December 2007.
Banks had stopped lending to each other because they were afraid of being caught with bad subprime mortgages. The Federal Reserve stepped in to restore liquidity and confidence.
10September 2007: Libor Rate Unexpectedly Diverges
As early as August 2007, the Fed had begun extraordinary measures to prop up banks. They were starting to cut back on lending to each other because they were afraid to get stuck with subprime mortgages as collateral. As a result, the lending rate was rising for short-term loans. This Libor rate usually is a few tenths of a point above the fed funds rate. By September 2007, it was almost a full point higher. The divergence of the historical Libor rate from its usual pace vis-a-vis the fed funds rate indicated the coming financial crisis of 2008.
11October 22, 2007: Kroszner Warned Crisis Not Over
Federal Reserve Governor said that, for credit markets, "the recovery may be a relatively gradual process, and these markets may not look the same when they re-emerge."
Kroszner observed that collateralized debt obligations and other derivatives were so complex that it's difficult for investors to determine what the real value and price should be. As a result, investors paid whatever the seller asked, based on his sterling reputation.
When the subprime mortgage crisis hit, investors began to doubt the sellers. Trust declined and panic ensued, spreading to banks. Kroszner forecasted that the CDO markets would not return to their previous ebullient state. He correctly warned that investors could not determine how to accurately price these complicated financial products. It was alarming to everyone that these complicated derivatives, which are barely understood by even the experts, could have such an important impact on the country's finances.
Also in October, 1.2 percent to a rate of 4.97 million. The sales pace was the lowest since the National Association of Realtors began tracking in 1999. Home prices fell 5.1 percent from the prior year to $207,800. Housing inventory rose 1.9 percent to 4.45 million, a 10.8 month supply..
12November 21, 2007: Treasury Creates $75 Billion Superfund
In November, then Treasury Secretary Paulson convinced three banks, Citigroup, JPMorgan Chase, and Bank of America, to set up a $75 billion superfund. According to FTAlphaville’s November 11, 2007 article, “,” Blackrock Investments managed the superfund to buy distressed portfolios of defunct subprime mortgages.
The fund would provide liquidity to banks and hedge funds that bought asset-backed commercial paper and mortgage-backed securities that lost value. The U.S. Treasury backed the Superfund to ward off further economic decline. The goal was to give the banks enough time to figure out how to value these derivatives. Banks would be guaranteed by the federal government to take on more subprime debt. But even a guarantee of zero losses wasn't enough to convince banks to be the ones stuck with the debt. The Superfund was a failure. The government was going to have to go it alone.
13December 12, 2007: Fed Announces TAF
Lowering the fed funds rate wasn't enough to restore bank confidence. Banks were afraid to lend to each other. No one wanted to get caught with bad debt on their books at the end of 2007.
The Fed held its first two $20 billion auctions on December 11 and December 20. Since these auctions were loans, to the Fed. It didn't cost the taxpayer anything.
If the banks had defaulted, taxpayers would have had to foot the bill like they with the Savings and Loan Crisis. It would have signaled a that the financial markets could not longer function. To prevent this, the Fed throughout March 8, 2010.
TAF gave banks a chance to gradually unwind their toxic debt. It also gave some, like and , a chance to find additional funds.
14Dec 2007 - Foreclosure Rates Double
RealtyTrac reported that the rate of foreclosure filings in December 2007 were 97 percent higher than in December 2006. The total than 2006. This means that foreclosures were increasing at a rapid rate. In total, 1 percent of homes were in foreclosure, up from 0.58 percent in 2006.
The that foreclosures would increase by 1 million to 2 million over the next two years. That's because 450,000 subprime mortgages reset each quarter. Borrowers couldn't refinance as they expected, due to lower home prices and tighter lending standards.
The Center warned that these foreclosures would depress prices in their neighborhoods by a total of $202 billion, causing 40.6 million homes to lose an average of $5,000 each.
2.2 percent to 4.89 million units. Home prices fell 6 percent to $208,400. It was the third price drop in four months.
The housing bust caused a stock market correction. Many warned that, if the housing bust continued into spring 2008, the correction could turn into a bear market, and the economy could suffer a recession.
The crisis in banking got worse in 2008. Banks that were highly exposed to mortgage-backed securities soon found no one would lend to them at all. Despite efforts by the Fed and the Bush Administration to prop them up, some failed. The government barely kept one step ahead of a complete financial collapse.
2007 Financial Crisis Explanation, Causes, and Timeline
Here's How They Missed the Early Clues of the Financial Crisis
The 2007 financial crisis is the breakdown of trust that occurred between banks the year before the 2008 financial crisis. It was caused by the subprime mortgage crisis, which itself was caused by the use of derivatives. This timeline includes the early warning signs, causes, and signs of breakdown. It also recounts the steps taken by the U.S. Treasury and the Federal Reserve. Unfortunately, it was not enough to prevent the Great Recession.