– What Led to the 2008 Real Estate Market Collapse?

Many experts had predicted the present crash in the real estate market. Despite this most people were caught unawares and were stunned when the opportunistic market started to collapse like a house of cards.

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The crash in the real estate market followed the collapse of the sub-prime market. This was the cause of sudden foreclosure of innumerable companies. Those which are not forced to close business endured billions of dollars in losses. Homeowners have been adversely affected by the news reports regarding sub-prime markets’ fall and yet many fail to understand the exact impact it has had on them, and why this has happened to them.

Sub-prime mortgages have been highly beneficial to many property buyers in the last few years. Even those who did not have good credibility could easily get sub-prime mortgages to invest in the real estate scenario to make a fast buck. Buyers with bad credit histories got these loans easily as the guidelines governing them were lax and did not follow stringent quality control. The lenders were also happy doing this as they could easily charge higher rates of interest when they sanctioned mortgages to borrowers with low credits. Some speculate that the lenders were not too bothered as, in case of payment defaults they could always make a foreclosure and resell the property for a profit.

So where did all this money come from? The money was procured from various sources. Lenders could easily get loans at low interest which they could pass on to the borrowers at a higher interest. Some of these sources were not so simple. Many governments including the American government allow loans from central bank.

The property market was very stable and had reached an unprecedented high by 2005. This stability had a reverse effect and it had people making unrealistic projections about the future growth in real estate and soon quite a few homeowners found themselves sinking into the loan traps.

The housing market started to decline during the period 2005-2006. This period saw over enthusiastic lenders giving loans to candidates with bad credibility. The lenders were looking at mammoth profits but the bubble started to burst once the interests became north bound. Increasing interest rates led to multiple problems in the housing scene. There is no exception to the rule that north bound interest rates spell trouble in the real estate market. Low rates encourage buying whereas high rates lead to a fall in prices. During the boom builders could not build fast enough for the markets, but with rising interest rates, there was increased default in mortgage payments, leading to a fall in housing demands. By the mid 2006 the market was witnessing the beginnings of an imminent crash.

Before long, lenders could no longer generate more money from their customary sources. With lesser funds on their hands the lenders suddenly became more cautious about whom they lent money, so getting a loan became increasingly difficult for potential homebuyers. The strings started to tighten from all directions. Investors became cautious, which in turn made the borrowing parameters stringent. Homeowners, who had adjustable loans, were facing an uphill task with their mortgage payments as increased interest rates translated to bigger installments every month. It was also becoming very difficult to refinance existing loans to as underwriting guidelines made it very difficult for them to get new loans. So they could not shift to fixed interest loans to salvage their deteriorating financial conditions. The net result was that foreclosure was the only option open to them and before long the market was engulfed in a flood of foreclosures.

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The review " – What Led to the 2008 Real Estate Market Collapse?" was last updated on 06/06/2009.