Why did the housing market collapse?

Answer 1

The simplest answer is the collapse of subprime mortgages. Over the last 10-15 years, as real estate prices rose steadily, people without much money either wanted to get their foot in the door of homeownership or buy into a house they really couldn't afford thinking they could "flip" it later for profit. Subprime loans were easy to get into (little to no money down, low interest rates for the first few years, etc), but once these loans matured and their interest rates began to fluctuate, owners without the income to back their purchase realized they couldn't pay their mortgage.

Combine this with the fact that the housing market cooled from oversupply and a strained economy, and you have a lot of people with property they can neither afford nor sell (after all, no one's buying in a bad economy). Further, banks were bundling these subprime mortgages together with lots of others and selling them as "mortgage-backed securities" - basically a package that a larger institution would invest in, believing its value was backed by the value of real property represented by mortgages. Your mortgage lender is invested in your house, so whoever invests in them by extension is also invested in your house. The problem was that as foreclosures increased, these securities became pretty worthless. On a large scale (and it was a very large scale) the scheme proved disastrous.

At the height of this collapse, loans were impossible to get, no one wanted to buy anyone else's house, many people could barely pay their mortgage or were going into foreclosure, and home values across the board were falling. The government bailout of major banks after the outright death of some of America's oldest financial institutions - basically nationalizing part of America's banking system - is the last solution. It is an attempt to restore confidence and liquidity to the market, so banks begin lending one another money again and consumers can start financing transactions like home-buying (an attractive idea for many now that home prices have fallen in many major markets). How the whole thing will play out, we'll just have to wait and see.

"The housing crash, however, did not happen overnight. A number of factors contributed to the housing crash resulting extensive foreclosures and plummeting housing prices to their all time low. One of the main cause for the housing crash lies in the fact that banks and financial institutions were lending mortgages at 5 to 10 times the annual incomes of people, which was way above the safe value of 3 to 4 times. These financial powerhouses used aggressive terms and conditions but did very little scrutiny while providing mortgages. This led to an easy cash flow in the market which fueled the housing prices as well. The US economic meltdown also played a major role in the housing market crash world over. Foreign investors who had invested in the real estate market in US had to declare bankruptcy owing to massive loss. The housing crash is expected to cost the banking system a whooping $2 trillion dollars. "