Question

Which of the following MOST likely contributed to the bubble that came before the housing​ crisis?

A.

Lenders bought houses as investments.

B.

Lenders relaxed borrowing requirements.

C.

Purchasers looked for bargains.

D.

Banks increased lending rates.

E.

Banks made borrowing tougher.

Answer 1

The correct answer is Option (B) Lenders relaxed borrowing requirements

Explanation -

One of the primary cause of the housing bubble was slack lending standards. The banks started lending to customers with a weak credit history and sub-prime loans boomed. This increased the demand for housing and potentially a second house as an investment. With the fed increasing rates in baby steps from 2004 to 2007, easy money contributed to the robust credit growth and the ultimate crisis.

Option D and Option E are incorrect as banks didn't tighten standards or increase rates. They made it easier to borrow.

Option A is incorrect Lenders did not buy houses as investments, but several individuals bought 2 or more houses as investments as housing prices were rising sharply.

Option C is also incorrect as purchasers didn't look for bargains while buying the house. The loans were easily available and the temptation to gain from rising housing prices made purchasers buy houses even just before the price peaked.