What does overextension of market value mean?

Discussion in 'Economy' started by pecans, Dec 12, 2012.

  1. pecans
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    pecans Rookie

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    I understand the market value's the price something can be sold at any given time, it's a fair price and one the seller and buyer agrees to. But if a market value is overextended, what would that mean? That the price of the good is even lower? I'm thinking of overextending as taking on more than you can handle, so if the market value's a certain price then overextending it would mean you're decreasing it more. Is this correct? Is overextension of market value good or bad? Pls help!
     
  2. martybegan
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    martybegan Gold Member

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    For a purchase like a house or property, it is the fact that the house's value is inflated by some outside force. In the financial crisis of 2008, housing values were overextended due to the outside force of a demand for more mortgages to bundle into Mortgage backed securities. The desire for more mortgages led to lenders approving people with lower credit scores, increasing demand for housing, thus increasing the price of houses as supply was lower than demand.

    The overextension comes from the fact that the cycle was unsustainable, and the prices were not a true indicication of the actual supply vs. demand, rather a skewed indication. Once the desireablilty of mortgage backed securities faded, and people realized they couldnt afford thier mortgages and started defaulting, demand dropped and supply rose.
     
  3. pecans
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    Thanks so much, martybegan!
     

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