The Real Estate Market Crash of 2008 – How Did We Get Here?

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The real estate market crash of 2008 left many people reeling and wondering how it happened. Before the crash, many experts had predicted that the real estate market was in a bubble that was bound to burst eventually. But even with all the warnings, the collapse still came as a shock to many.

So, what caused the crash? The answer lies in the subprime lending market. This market allowed people who couldn’t qualify for conventional mortgages to obtain financing via subprime mortgages. However, these loans often came with high-interest rates and unfavorable terms.

Lenders obtained money to pay for these mortgages from various sources, such as low-interest loans and central banks. When the housing market was stable, the ill effects of these loans were not immediately apparent. In fact, the market was experiencing a surge in value that was unprecedented. This surge led to an unrealistic expectation of the future real estate market, which in turn caused lenders to put even more money into funding mortgages that new homeowners could not afford.

But when interest rates started to rise, people stopped buying homes. Homeowners also started to fail to make payments due to the interest rate spike. It became harder and harder for lenders to obtain funds to invest in mortgages. Buyers, now unable to qualify for a loan easily, began to stop looking for a home to purchase. Investors became wary, and underwriters started increasing the requirements to qualify for a loan.

People who had adjustable rate mortgages desperately sought to decrease their skyrocketing monthly payments. But they could not qualify for a new, fixed loan under the strict guidelines. This only caused the number of foreclosures to rise dramatically, resulting in the real estate market crash of 2008.

The crash left many people devastated, losing their homes and savings. But what can we learn from this experience? Firstly, it’s important to understand the risks involved in subprime lending. While subprime mortgages can help those who can’t qualify for conventional mortgages, they come with higher interest rates and unfavorable terms.

It’s also essential to be aware of market trends and to plan accordingly. Even though the housing market was experiencing an unprecedented surge, it was not sustainable in the long term. Buyers and investors alike should always be cautious and take a long-term view of the market.

Finally, it’s crucial to be financially prepared for unexpected changes in the market. This means having an emergency fund and being realistic about your ability to pay for a mortgage. A good rule of thumb is to keep your housing expenses at no more than 30% of your income.

In conclusion, the real estate market crash of 2008 was caused by a combination of factors, with subprime lending being the main culprit. While we cannot change the past, we can learn from it and be better prepared for the future. By being financially responsible and aware of market trends, we can avoid being caught off guard by future market crashes.

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by Sal S Vannutini