Question

In 2008 we saw increased unemployment which then caused default on high risk loans which caused a collapse in the housing market. Now we have historic high unemployment yet the housing market is booming. How do you reconcile these differences?

Answer 1

Yes, there are differences between these two situations because currently even though employment rate are higher, it does not mean that the current economy status is is that weak as 2008 because in 2008 there was a bubble in securities and asset prices of housing market but currently there is no bubble in the underlying securities and even though unemployment is higher but it is basically due to coronavirus and this disease is likely to go once the vaccine is found so it is not a major economic collapse but it is a economic downturn which has been triggered by the health crisis whereas 2008 was a complete economic crisis which was led by economic factors and poor management of the economy and there was a high risk of financial contagion among various security but currently the financial sector is strong and we have a proactive Federal Reserve who is trying to stabilize the situation proactively by cutting down the interest rates and managing the underlying economy in a better way by providing it with the bailout package so both the situations are different.

2008 was majorly characterized by poor management of asset prices and real estate prices and there was unnecessary greed of making money by floating substandard asset at standard assets and which led to a lot of financial bubble but this time it is not a financial bubble which has been created but rather it is a economic downturn which has been triggered by a health crisis and it is getting better day by day because we can even see that optimism in the stock market that it made a new 52 week high even after slipping into the bear market so it can be said that the contrast between the two situations can be easily visible and there is a high optimism of economic recovery and the underlying sector has not been that bad to trigger a recession so these both situations are different even the unemployment is being recorded at a high speed.