The keyword “invest 11 storm” refers to the 2008 US housing bubble burst and subsequent financial crisis. As housing prices skyrocketed from 2000 to 2006, many speculated that real estate was a failsafe investment. This drove further home purchases and inflated housing prices even more. However, in 2007, default rates began rising as teaser rates on subprime mortgages reset higher. In 2008, major financial institutions that held mortgage-backed securities began failing. This caused a ripple effect through the global financial system. Ultimately, the housing bubble burst led to the Great Recession, demonstrating the risks of real estate speculation.
Housing prices surged from 2000-2006, driving speculative buying
From 2000 to 2006, average US housing prices increased dramatically. The Case-Shiller national home price index rose over 90% during this period. Many factors drove this rapid price appreciation. Low interest rates made mortgages cheap and easy to obtain. Financial deregulation allowed lenders to offer enticing teaser rates on subprime mortgages. As prices climbed, a buying frenzy emerged. Many assumed housing was a failsafe investment and purchased homes as speculative investments. This increased demand pushed prices even higher in a feedback loop.
In 2007, default rates spiked as teaser rates reset higher
A major driver of the housing bubble was teaser rates offered on subprime mortgages. These mortgages offered low initial rates that would reset to much higher rates after a few years. In 2007, many of these teaser rates began resetting. This caused borrower monthly payments to spike. As a result, default rates surged. In the third quarter of 2007, foreclosure filings jumped 75% year-over-year. It became clear many subprime borrowers could not actually afford their mortgages at higher rates.
The collapse of overleveraged financial institutions triggered the 2008 crisis
Many major financial institutions held significant exposure to subprime mortgage-backed securities. As mortgage defaults rose, these securities plummeted in value. However, the systemic risk posed by these securities was not well understood. A lack of transparency meant few realized just how overleveraged some institutions were. In March 2008, Bear Stearns, a leading underwriter of mortgage-backed securities, required emergency funding from the Federal Reserve to avoid bankruptcy. Then in September 2008, Lehman Brothers collapsed, setting off a chain reaction through the global financial system. Tightly coupled credit markets froze, triggering a severe credit crunch.
The bursting of the housing bubble led to the Great Recession
As banks failed and credit markets froze, lending essentially halted, damaging businesses and consumers. Unemployment spiked as firms laid off workers. Home prices continued falling as the oversupply of houses met frozen demand. Overall, the S&P 500 fell 57% from peak to trough. GDP contracted and many countries entered recession. In the US, this became known as the Great Recession. The crisis demonstrated the risks associated with asset bubbles and overleveraged institutions. Reasonable regulation may have reduced systemic risk and severity.
The “invest 11 storm” refers to the bursting of the 2000s US housing bubble, which triggered the 2008 financial crisis and Great Recession. As speculative mania pushed housing prices ever higher, it created a system vulnerable to collapse. The crisis highlighted the dangers of asset bubbles, tight financial coupling, and overleverage.