Further Reading

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.

Reports regarding the subprime market crash have been splashed all over the news. While these events have affected most property owners, most are still uncertain how it all happened.

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 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.

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.

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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