Events Leading Up To The 2008 Real Estate Market Collapse

Though the recent real estate market collapse had been predicted by many persons, others were still caught off guard when the previously profitable market which had once provided so many opportunities began to crumble.

Certainly, the preceeding subprime market crumbling was one of the major causative events resulting in the real estate market's demise. This resulted in the imminent foreclosure of an unfathomable number of companies. Even companies which were not forced into foreclosure had suffered the sudden loss of billions of dollars. Though there have been several news reports on the subprime market's crash which has affected many homeowners to some extent, many persons remain unclear as to how exactly this situation came into existence.

In recent years past, subprime mortgages had been of great advantage to quite a number of property buyers. Persons with poor credit histories who still wanted to make use of the exciting real estate market were now able to do so through subprime mortgages. The guidelines governing the issuance of these loans were less stringent than traditional mortgages, thus allowing even those buyers with very poor credit ratings to acquire a loan. The tradeoff for granting loans to buyers with bad credit ratings was that lenders were now able to demand higher interest rates. It is also theorized that lenders were reliant on the concept that, should a borrower default on their loan, the lender would then have the right and accompanying ability to foreclose on the property with the option to resell for profit.

The money funding these loans had been derived from a wide variety of sources. For instance, low interest rates created the opportunity for lenders to borrow the money which they were going to lend to potential home buyers. In some other instances, more complicated sources have been utilized. For instance, there is the common practice for many governments, including that of the United States, to accept loans from central banks.

At that point, the housing market had been remarkably stable and was in fact at an all time high. This stability in the market caused many persons to make unrealistic projections of future growth and many home buyers now found found themselves deep in debt.

The boom in the hosuing market began to come to an end in the years 2005 and 2006. In that two year period, lenders were quite eager to grant loans regardless of the borrowers' credit profile. These lenders stood to generate a tremendous profit from these loans but as interest rates started to increase, so too did the problems in the housing market. Throughout history it has been seen that increases in interest rates impact negatively on real estate. Low rates create demand, whereas high rates result in lower prices. Builders were hard pressed to meet the high demand for houses. As mid-2006 approached, however, the demand for housing began to dwindle and the rate of borrowers defaulting on loans started to increase.

It was not long until mortgage lenders began experiencing difficulties obtaining funding from their usual sources. This had the effect of making the loan acquisition process much more difficult for potential homebuyers since there were now less funds available. Investors also increased their guard with respect to assuming risks and the guidelines for underwriting became even more strict. The increasing interest rates created a difficulty for homeowners with adjustable rate loans to make timely payments on their mortgages. Furthermore, the heightened stringence of underwriting guidelines robbed many of these borrowers of the opportunity to refinance their mortgages to fixed rates. The net effect was a continuing increase in the rate of loan defaults, thereby leading to a massive amount of forclosures.