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Events Leading to the Real Estate Market Crash of 2008
While many predicted the current collapse of the real
estate market, others were taken by surprise when the
market that had left plenty of opportunity in the last
few years for profit began to tumble.
Certainly, one of the leading events that eventually
resulted in the crash of the real estate market was the
crumble of the subprime market. As a result an
unfathomable amount of companies suddenly were suddenly
facing foreclosure. Even those companies that were not
forced to declare foreclosure found they had suddenly
lost billions of dollars.
The news has been filled with reports regarding the
subprime market crash; however, while it has affected
most property owners to some degree there remain many of
remain uncertain exactly how this came to be.
Just a few years ago subprime mortgages were a great
advantage to many property buyers. Buyers who were
interested in taking advantage of the hot real estate
market but who lacked good credit histories were able to
take advantage of subprime mortgages in order to obtain
loans. The underwriting guidelines for these loans were
generally more lax than traditional mortgages. This
allowed even buyers with poor credit to obtain a loan.
In exchange for making a loan to buyer with less than
stellar credit, lenders were able to charge a higher
rate of interest. In addition, so the theory went,
lenders relied on the belief that they would be able to
foreclose on property and sell it for a profit in the
event the borrower defaulted on the loan.
The money which funded these loans came from a variety
of sources. Low interest rates made it possible in many
instances for lenders to actually borrow money and then
loan out those funds to home buyers. In other cases, the
money was obtained from more complicated sources. As you
may or may not be aware, it is not uncommon for
governments to borrow money from central banks. This
practice is particularly common in the United States.
At the time the housing market was stable. In fact, the
housing market was experiencing a high that had not been
seen in quite some time. Beyond the fact that many
homebuyers were taking on massive amounts of debt there
also existed another problem. Due to the health of the
real estate market at the time, in many cases there were
expectations regarding future growth that in hindsight
now appear to have been unrealistic.
The last two years of the real estate boom occurred in
2005 and 2006. During that time period lenders did not
hesitate in the least to lend money to borrowers
regardless of their credit profile. These loans
represented a tremendous money-making opportunity for
lenders. Problems really began to occur; however, when
interest rates began to rise from their previous lows.
Historically, rising interest rates have always had a
negative effect on the real estate market. When rates
are low they help to produce demand; however, when they
are high they ultimately cause prices to fall. Until
mid-2006 home builders could not build new homes fast
enough to meet the growing demand. During mid-year;
however, the demand began to slow. It was also about
this time that the rate of defaults on loans began to
increase.
Before long many mortgage lenders began to find it
difficult to obtain money from their previous sources of
funding. As a result, would-be buyers discovered that
loans were no longer as easy to obtain due to the fact
that money was no longer as widely available.
Additionally, investors suddenly became wary of taking
on risk and underwriting guidelines grew stricter.
Homeowners who had taken out loans with adjustable rates
began to find it difficult to meet their mortgage
payments as interest rates continued to rise. More
stringent underwriting guidelines meant they were unable
to refinance to fixed rate mortgages in some cases. As a
result, defaults continued to rise; fueling the massive
rash of foreclosures.
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