What caused the housing market collapse of 2007/2008


    What caused the housing market collapse of 2007/2008

  • 1 Interest rates were very low post year 2000

    After the tech bubble interest rates were kept at low levels while the stock market made modest gains. This motivated investors to move somewhere else where they can make good returns. The housing market was the choice then.

  • 2 Housing prices rose fast

    Housing prices started rising fast and that drew more investors to the market. Speculators joined the market and the prices were even pushed higher. People started feeling richer as their houses got more expensive and this fueled spending (see signs the stock market is about to crash).

  • 3 It was very easy for people to take a loan to buy a house

    Due to the ease of obtaining a loan to buy a house without having to provide so much credentials many people entered the housing market without having the ability to pay the long term dept. Those people hoped to sell their houses later for higher prices.

  • 4 Fannie Mae and Freddie Mac fueled the subprime mortgage market

    Fannie Mae and Freddie Mac aggressively facilitated the growth of the subprime mortgage market. The subprime mortgage market refers to the market where borrowers with low credit score and less savings can still get a loan to buy a house.

  • 5 The rise of mortgage-backed securities (MBS)

    Mortgage-backed securities are securities that are based on a pool of mortgages. Investors buy MBS's and benefit from the mortgage income paid by the borrower. When housing prices went down many borrowers started to default and MBS's lost their value.

  • 6 Mortgage-backed securities were given AAA rating

    The risky mortgage-backed securities were given AAA ratings thus giving investors a false level of confidence where they believed that those securities were extremely safe. The MBS's at that time were heavily dependent on the subprime market.

  • 7 Homeowners started defaulting

    As housing prices went down homeowners had to pay higher mortgages. Since those homeowners had no enough money to pay their mortgages as their initial plan was to sell those houses they started defaulting (Failing to pay the mortgage amount).

  • 8 Bear Stearns collapsed

    Because of its heavy involved in the Subprime Mortage market Bear Stearns, a very large investment company, started collapsing. Bear Stearns announced a loan of 3.2 billion dollars to help itself bailout the funds invested in Subprime Mortage market.

  • 9 Prices of mortgage-backed securities started going down

    When housing prices started declining the prices of mortgage-backed securities started going down. Investors started losing the confident they already had and this fueled the market collapse.

  • 10 The government took over Fannie Mae and Freddie Mac

    Because of being so involved in the subprime market both Fannie Mae and Freddie Mac suffered serious financial losses that the government had to take over them to save them. This made the crisis even worse.

  • 11 Lehman Brothers files for bankrucpy

    Lehman Brothers, the large investment firm, filed for bankruptcy for the same reason. Panic increased even more as a result of the news.

  • 12 The credit crunch made the problem worse

    As many banks and financial institutions suffered serious losses it became very hard to obtain a new loan or get credit. Credit crunch is the term used to describe the sudden reduction in availability of loans.

  • 13 People sold their houses at very low prices

    In order to pay their dept people had to sell their houses for very cheap prices since the demand was already low. Because so many people were trying to sell their houses at the same time the prices collapsed.