Deck 13: The Housing Bubble

Question 1

The least affordable places to live tended to be located disproportionately in the

A)upper Mid-West.
B)mid-Atlantic states and along the West Coast.
C)Great Plains states.
D)southeastern states.

Answer 1

B

Question 2

The least affordable places to live tended to be located disproportionately in

A)Michigan.
B)Iowa.
C)California.
D)Ohio.

Answer 2

C

Question 3

If the typical home in Des Moines were located in San Francisco, it would probably

A)command a higher market price.
B)command a lower market price.
C)command the same price, since it is still just a typical house.
D)be at lower risk for earthquake damage.

Answer 3

A

Question 4

In 2006 and 2007, for the first time in decades, in many major urban areas across the U.S.,

A)property tax rates decreased.
B)housing prices began to fall.
C)the NASDAQ stock market lost approximately 70% of its value.
D)Springfield, Ohio became the nation's Least Affordable Place to Live according to NAHB.

Question 5

Among the most important demand side factors explaining homes prices would be the

A)rates charged by licensed plumbers.
B)cost of land.
C)cost of lumber.
D)local population growth rate.

Question 6

The difference between the purchase price of a home and the amount of the mortgage is the

A)leasehold.
B)indebtedness.
C)down payment.
D)term to maturity.

Question 7

Mortgage amortization is a plan to

A)reduce the borrower's original debt over a specified period of time.
B)reduce the borrower's original equity in the home over a specified period of time.
C)pay off exactly 80% of the value of the home over a specified period of time.
D)increase the borrower's marginal income tax rate over a specified period of time.

Question 8

Among the most important demand side factors explaining homes prices would be the

A)growing shortage of real estate agents.
B)relative price of hybrid vehicles.
C)level of mortgage interest rates.
D)adoption of CAFTA.

Question 9

The most affordable places to live tended to be located disproportionately in

A)California, New York and New Jersey.
B)Michigan, Ohio and Illinois.
C)Mississippi and Louisiana.
D)all of these, because affordable places to live are randomly distributed geographically.

Question 10

Among the most important demand side factors explaining homes prices would be the size of the

A)metropolitan area.
B)homebuyer's car.
C)home.
D)metropolitan area and home itself.

Question 11

Among the key ingredients of what a house is fundamentally worth would be

A)the opportunity cost of the land on which the house is located.
B)the quality of the school system in which the house is located.
C)"location, location, location"!
D)all of the options are correct.

Question 12

The mathematics of amortization for mortgage loans must utilize the

A)borrower's marital status.
B)borrower's ethnicity.
C)period of time over which the debt will be repaid.
D)all of the options are correct.

Question 13

Cities like Indianapolis and Dallas are unbounded by mountains or oceans while cities like Los Angeles and San Diego are bounded by both. A housing bubble is

A)equally likely to occur in all of these cities.
B)more likely to occur in cities like Dallas and Indianapolis.
C)more likely to occur in cities like Los Angeles and San Diego.
D)unrelated to the supply of land.

Question 14

Among the most important demand side factors explaining homes prices would be the

A)number of homebuilders.
B)income of potential homebuyers.
C)average wage paid to carpenters.
D)cost of lumber.

Question 15

Among the most important supply side factors explaining homes prices would be the

A)size of the metropolitan area.
B)size of the homebuyer's car.
C)cost of land
D)size of the metropolitan area and the cost of land.

Question 16

Among the most important demand side factors explaining homes prices would be the age of

A)the home.
B)the homebuyer's car.
C)Supreme Court justices.
D)consent.

Question 17

The mathematics of amortization for mortgage loans must utilize the

A)interest rate.
B)borrower's marginal income tax rate.
C)borrower's age.
D)borrower's marital status.

Question 18

The mathematics of amortization for mortgage loans must utilize the

A)structure of marginal tax rates.
B)payment frequency.
C)period of time over which the debt will be repaid.
D)payment frequency and the period of time over which the debt will be repaid.

Question 19

The mathematics of amortization for mortgage loans must utilize the

A)interest rate.
B)payment amount.
C)period of time over which the debt will be repaid.
D)all of the options are correct.

Question 20

The most affordable places to live tended to be located disproportionately in the

A)upper Mid-West.
B)mid-Atlantic states and along the West Coast.
C)Great Plains states.
D)southeastern states.

Question 21

Other things equal, increasing home prices tend to

A)force homeowners to spend less than they earn.
B)allow homeowners to spend more than they earn.
C)leave homeowners' ability to spend unaffected.
D)increase the likelihood that homeowners will default on their mortgages.

Question 22

Compared to the traditional mortgage amortization schedule, "interest-only" mortgages and "negative-amortization" mortgages require

A)larger principal payments later in the mortgage.
B)smaller principal payments later in the mortgage.
C)constant principal payments later in the mortgage.
D)no principal payments later in the mortgage.

Question 23

The traditional mortgage amortization schedule specifies a monthly payment that is

A)increasing over the life of the mortgage.
B)decreasing over the life of the mortgage.
C)constant over the life of the mortgage.
D)first increasing, then decreasing, over the life of the mortgage.

Question 24

"Exotic" mortgages became popular in part because home prices were expected to

A)rise quickly.
B)fall precipitously.
C)remain virtually constant.
D)become increasingly unpredictable.

Question 25

A mortgage loan that would allow a borrower to repay none of the principal of the debt over the first few (typically five or ten)years of the mortgage could be called

A)a "zero-down" mortgage.
B)an "interest-only" mortgage.
C)a "zero-interest" mortgage.
D)all of the options are correct.

Question 26

A "bubble" in the housing market can be more easily fueled by

A)traditional mortgage loans.
B)cash-only financing requirements.
C)exclusive reliance upon banks as a source of credit.
D)"exotic" mortgages.

Question 27

Many years ago, the traditional mortgage loan structure specified

A)a down payment of 20%.
B)an initial loan-to-value ratio of 100%.
C)a variable interest rate.
D)all of the options are correct.

Question 28

"Exotic" mortgages became popular in part because they allow someone of

A)means to get into a home they would easily have been able to afford.
B)modest means to get into a home they might otherwise not have been able to afford.
C)modest means to build more equity in their home than a traditional mortgage would allow.
D)modest means to build their credit score by proving they could make challenging payments.

Question 29

An asset price "bubble" is created when

A)buyers base their purchase decision upon solid fundamentals.
B)sellers base their sale decision upon solid fundamentals.
C)buyers base their purchase decision upon their expectation that the asset's price will rise.
D)sellers base their sale decision upon their expectation that the asset's price will fall.

Question 30

The "exotic" mortgage instrument of recent years is exemplified by the

A)bank mortgage loan.
B)"magical-mystery" mortgage.
C)"negative-amortization" mortgage.
D)"traditional" mortgage.

Question 31

Other things equal, increasing home prices tend to

A)increase homeowners' equity in their homes.
B)decrease homeowners' equity in their homes.
C)leave homeowners' equity in their homes unaffected.
D)increase the likelihood that homeowners will default on their mortgages.

Question 32

Many years ago, the traditional mortgage loan structure specified

A)a down payment of 100%.
B)an initial loan-to-value ratio of 80%.
C)a variable interest rate.
D)all of the option are correct.

Question 33

Since the 1980s, mortgages allowing less than 20% down payment have appeared, requiring

A)lenders to insure the borrower against physical damage to the house.
B)lenders to insure the borrower against loss in case of default.
C)borrowers to insure the lender against loss in case of default.
D)both borrowers and lenders to hold each other harmless in case of default or physical damage.

Question 34

The "interest-only" mortgage typically converts later to a

A)traditional mortgage with a higher payment.
B)traditional mortgage with a lower payment.
C)"negative-amortization" mortgage with a lower payment.
D)"exotic" mortgage with a lower payment.

Question 35

The "exotic" mortgage instrument of recent years is exemplified by the

A)bank mortgage loan.
B)"traditional" mortgage.
C)"magical-mystery" mortgage.
D)"interest-only" mortgage.

Question 36

A mortgage loan that would allow a borrower to purchase a home paying only the paperwork costs of the loan at closing could be called a

A)"liar" loan.
B)"traditional" mortgage.
C)"zero-down" mortgage.
D)all of the options are correct.

Question 37

The "negative-amortization" mortgage typically converts later to a

A)traditional mortgage with a higher payment.
B)traditional mortgage with a lower payment.
C)new "negative-amortization" mortgage with an even lower payment.
D)"exotic" mortgage with a lower payment.

Question 38

A mortgage loan that would allow a borrower to pay less than the full interest accrued on the debt over the first few (typically five or ten)years of the mortgage could be called

A)an "interest-only" mortgage.
B)a "zero-interest" mortgage.
C)a "negative-amortization" mortgage.
D)all of the options are correct.

Question 39

An asset price "bubble" is often supported by

A)buyers with irrationally pessimistic price expectations,
B)sellers with irrationally pessimistic price expectations.
C)politicians with insatiable appetites for capital gains tax revenues.
D)borrowed money.

Question 40

Unlike the traditional mortgage amortization schedule, "negative-amortization" mortgages permit the

A)mortgage payments to exceed the accrued interest during the early years of the mortgage.
B)principal payments to grow at a constant rate during the early years of the mortgage.
C)value of the house to depreciate during the early years of the mortgage.
D)outstanding balance to increase over a part of the life of the mortgage.

Question 41

The bursting U.S. housing bubble of 2007 did not trigger an immediate recession because

A)the bubble only existed in relatively few locations.
B)previous homeowners were able to move into apartments.
C)FEMA provided trailers for use by distressed homeowners.
D)all of the options are correct.

Question 42

A notable macroeconomic effect of the bursting U.S. housing bubble in 2007 was a

A)modest reduction in Real GDP growth of one percentage point.
B)marked expansion in the construction sector of the economy.
C)dramatic contraction of aggregate consumption spending.
D)all of the options are correct.

Question 43

Borrowers who use "exotic" mortgages when purchasing a home must expect

A)their income to increase.
B)the value of the home to increase.
C)an increase in the value of the home and their income.
D)Congress will act to make everything "turn out in the end".

Question 44

If homeowners purchased a $250,000 home with a zero-down, interest-only mortgage, and the value of the home subsequently fell to $200,000, the homeowners' equity in the home would be approximately

A)-$50,000.
B)zero.
C)$50,000.
D)$200,000.

Question 45

In comparing the traditional way of structuring mortgages and the newer structure of providing mortgages that securitized them and insured those securities with credit default swaps , it is clear that the ____ structure increased homeownership rates and that the ___ structure was riskier to the health of the overall economy.

A)traditional; traditional
B)newer; newer
C)traditional; newer
D)newer; traditional

Question 46

The companies that were the largest securitizers of mortgages were

A)AIG.
B)Goldman Sachs.
C)Freddie Mac & Fannie Mae.
D)the Fed.

Question 47

The bursting U.S. housing bubble of 2007 did not trigger an immediate recession because

A)previous homeowners were able to move into apartments.
B)mortgage interest rates remained relatively low.
C)Democrats in control of Congress passed new tax cuts for distressed homeowners.
D)all of the options are correct.

Question 48

A mortgage that allows the borrower to choose the monthly payment for a few years is a

A)traditional, thirty-year fixed rate mortgage.
B)pay option adjustable rate mortgage.
C)credit default swap.
D)"liar loan".

Question 49

The company that was the largest seller of credit default swaps was

A)AIG.
B)Fannie Mae.
C)Freddie Mac.
D)the Fed.

Question 50

In comparing the traditional way of structuring mortgages and the newer structure of providing mortgages that securitized them and insured those securities with credit default swaps , it is clear that the ____ structure allowed more people to afford homes and that the ___ structure was safer to the health of the overall economy.

A)traditional; traditional
B)newer; newer
C)traditional; newer
D)newer; traditional

Question 51

By 2006 and 2007, foreclosure rates in some previously-booming states such as Nevada and Colorado were

A)still far below the national average.
B)roughly equal to the national average.
C)three times the national average.
D)one hundred times the national average.

Question 52

A security that pays the holder should mortgage borrowers fail to repay their debts is a

A)credit default swap.
B)traditional, thirty-year fixed rate mortgage.
C)pay option adjustable rate mortgage.
D)thirty-year U.S. Treasury bond.

Question 53

One economic factor that can restrain the maximum rate of home price appreciation is

A)the ready availability of negative amortization and pick-a-pay mortgage instruments.
B)the ready availability of pay option adjustable rate mortgages.
C)geographic barriers to residential development, such as mountains, oceans and swamps.
D)a relatively elastic supply of land available for residential development.

Question 54

In comparing the traditional way of structuring mortgages and the newer structure of providing mortgages that securitized them and insured those securities with credit default swaps, it is clear that the ____ structure increased homeownership rates and that the ___ structure was safer to the health of the overall economy.

A)traditional; traditional
B)newer; newer
C)traditional; newer
D)newer; traditional

Question 55

If homeowners with no savings purchased a $250,000 home using a zero-down, interest-only mortgage, and the value of the home subsequently fell to $200,000, in order to sell the house and move to another city, the homeowners might be forced to

A)pay off their car loan early.
B)move into the YMCA.
C)declare bankruptcy.
D)buy a second home in their new city without first selling their first home.

Question 56

A notable macroeconomic effect of the bursting U.S. housing bubble in 2007 was a

A)sharp reduction in Real GDP that increased the unemployment rate by two percentage points.
B)marked expansion in the construction sector of the economy.
C)modest reduction in the growth rate of aggregate consumption spending.
D)all of the options are correct.

Question 57

If homeowners purchased a $250,000 home with a zero-down, interest-only mortgage, and the value of the home subsequently fell to $200,000, in order to sell the house and move to another city, the homeowners would be required at closing to pay (in addition to the proceeds from the home sale)

A)nothing.
B)$50,000.
C)any transaction costs and real estate fees.
D)$50,000 plus any transaction costs and real estate fees.

Question 58

In the 1950s, a traditional, thirty-year fixed rate mortgage would typically have been

A)securitized and sold to a consortium of foreign investors.
B)held by the original lender or banker until it was paid off.
C)available to the borrower without a down payment and without documentation of income.
D)all of the options are correct.

Question 59

Homeowner with good credit history usually will be

A)wise enough never to borrow any of their home equity for any purpose.
B)wise enough to borrow part of their home equity only for sensible goals, like a big new SUV.
C)able to borrow part of the equity in their home to achieve reasonable financial goals.
D)unaware that borrowing part of the equity in their home will increase their monthly payments.

Question 60

A mortgage that allows the borrower to pay less than the interest due for a few years is a

A)credit default swap.
B)"liar loan".
C)negative amortization mortgage.
D)traditional, thirty-year fixed rate mortgage.

Question 61

Asset price "bubbles" are sustained price increases driven by economic fundamentals.

Question 62

"Negative-amortization" mortgages are best-suited to borrowers who are nearing retirement and expect their income to decrease in the future.

Question 63

In comparing the traditional way of structuring mortgages and the newer structure of providing mortgages that securitized them and insured those securities with credit default swaps , it is clear that the ____ structure allowed fewer people to afford homes and that the ___ structure was safer to the health of the overall economy.

A)traditional; traditional
B)newer; newer
C)traditional; newer
D)newer; traditional

Question 64

Asset price "bubbles" occur when buyers expect asset prices to increase in the future.

Question 65

"Exotic" mortgages require a down payment of at least 20%.

Question 66

Size and age are "fundamental" determinants of the price of any house.

Question 67

Monthly payments on "negative-amortization" mortgages typically increase over the life of mortgage.

Question 68

Housing "affordability" is measured by the ratio of local housing price to local income.

Question 69

Location is a "fundamental" determinant of the price of any house.

Question 70

Asset price "bubbles" are more likely to occur when interest rates are relatively low.

Question 71

Monthly payments on "exotic" mortgages are constant over the life of the mortgage.