Real Estate Market Crash of 2008 Leadup

There are many who predicted the inevitable crash of the US housing market, but others were shocked when a market that had plenty of go over the past few years began it's downward slide.

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.

A few years ago many property buyers found subprime mortgages as a great advantage. Low credit ratings, eager buyers and institutions willing to give out subprime loans combined to allow investors to buy properties rapidly. On subprime loans, the underwriting guidelines are are easier to meet than on more convential mortgages. These gave people with poor credit a chance to obtain a loan. Lenders were able to charge higher rates of interest to these buyers with less than good credit. Additionally, lenders had the belief that if they had to foreclose on the home due to non-payment, they would be able to sell the property at a profit.

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 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.

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.

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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