Real Estate Market Crash of 2008 Leadup

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.

One of the main causes of the current tumble was the crumbling of the subprime market. Because of many subprime loans, companies were quickly faced with foreclosure. Even if companies weren't facing foreclosure, they saw the loss of 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.

Money to fund these loans came from a wide variety of sources. Extremely low interest rates made it possible for lenders to borrow money themselves and then loan it back out to subprime home buyers. Sometimes, the money was received through more complicated channels. One of these ways is by governments borrowing money from central banks. This is particularly common in the United States.

At this point in time the housing market was stable. The real estate market was seeing a high that had not been seen in quite a few years. In addition to many homeowners taking an massive debt they couldn't afford, there is another problem. The forecasts for the real estate market were completely unrealistic. Future growth was predicted at double digits for an infinite number of years, it seemed.

2005 and 2006 saw the last of the housing boom. During that time and prior, lenders were throwing loans at anyone with a pulse. These subprime loans were tremendous cash cows for lenders. Problems began to occur when interest rates began to rise from previous record lows. Historically, rising interest rates have had a negative effect on the housing market. Low rates(cheap money) help produce demand and high rates tend to cause prices to fall. Up to mid-2006 the construction market could not keep up with increasing demand. At mid-year the demand began to fall. It was at this point the number of defaults and foreclosures began to mount.

Very soon many mortgage lenders began to find it hard to access money from their previous sources of funding. As a result, most would be buyers found it harder to obtain loans as cheap money to the lenders was harder to find. In addition, investors became wary of the increasing risk and made their underwriting guidelines stricter. Homeowners with adjustable rate mortgages began to find it hard to meet their monthly mortgage payments in the face of increasing interest rates. When they tried to refinance with the stricter underwriting guidelines, they found it impossible to obtain a fixed rate mortgage. As a result, defaults continued to rise fueling a huge mass of foreclosures.

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