Wednesday homework

1) Illustrate with examples what is meant by secured and unsecured debt.

a) Secured Debtv- Debt backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.

b) Unsecured Debt - When you carry an unsecured debt, your creditor does not hold any collateral that they can take back if you fail to pay. For example a credit card or the legal bills.

2) What factors might help to explain the longer-term growth in secured and unsecured debt over recent decades?

During the last decades we had a gradually increasing boom on the housing market. People thought that the value of their property will never fall, but only increase. Therefore, when their houses (they already had a mortgage on) theoretically grew in value, they run into another debt in order to buy some cars or a new TV. Unfortunately, the main factor why the both types debt level increased is humans' greed and recklessness.

3) What factors might help to explain the more recent patterns in secured and unsecured debt?

The lack of activity in the housing market. People, who already have mortgages pay them, but those who do not have house loans, do not take them. It mainly stems from a lack of confidence and the fact that, in general terms,  people have less money.

4) What do you understand by the term housing equity withdrawal?

It is borrowing that is secured on the housing stock but not invested in it, so it represents additional funds available for reinvestment or to finance consumption spending. So I borrow some more money, but instead of trying to multiply them and make profit (by f.i. developing my own business), I buy a better car.

5) What is meant by negative HEW?

It means that people gave up borrowing additional money on their houses.

6) What factors might help to explain the negative HEW observed for the past twelve quarters?

It is mainly due to the willingness of people to clear their debt. The current time is unsure for peoples' wallets so they want to have a clear financial situation and, therefore, they try to get rid of their debts.

7) What implications might there be for economic growth of negative housing equity withdrawal (HEW)?

If people have less money on spending the demand is going to fall. Therefore, the production will drop as well. The unemployment is more likely to increase as well. Generally, the GDP might be negatively effected due to that phenomenon.