Collapsing home prices from subprime mortgage defaults and risky investments on mortgage-backed securities burst the housing bubble in 2008.
Real estate prices rose steadily in the United States for decades, with slowdowns caused only by interest rate changes along the way. Prices increased over time as demand for homeownership through government-sponsored programs increased, along with the general sentiment that owning real estate represents the American dream.
Mortgages became available to a wider range of consumers with programs offered by Fannie Mae, Freddie Mac, and others, which may have put money in the hands of some irresponsible homeowners who would later default on payments. Interest rates remained in an affordable range throughout the mid-1990s and early 2000s, making homeownership even more affordable. As with other investments, real estate couldn't possibly appreciate year over year at such a pace forever, and soon the bubble burst.
What Is a Housing Bubble?
The collapse certainly didn't happen overnight, but loud rumblings started to occur as subprime mortgages—those made to consumers with less-than-perfect credit—became 20% of the market in 2006. Some banks made subprime mortgages their entire business, and in early 2008 they began to see late payments and defaults in such high numbers that many banks collapsed.
Heavy subprime portfolios quickly brought down insurance companies such as AIG that had insured these mortgages. Pools of mortgages used for investments were defaulting, and institutions such as Lehman Brothers and Bear Sterns that underwrote, owned and sold many such investments saw drops in value so great they not only had to shut their doors but also brought down others. Meanwhile, the increased foreclosures began to bring down values of nearby homes, and the chain reaction spread across the country from 2008 to 2010.
As a seasoned expert in financial markets and economic trends, I've closely studied the intricate details of the 2008 housing market collapse. My extensive background in finance and economics provides me with a deep understanding of the factors that led to the bursting of the housing bubble. Allow me to share my insights into the evidence and concepts related to the collapse.
The 2008 housing crisis was rooted in the fallout from subprime mortgage defaults and the risky investments tied to mortgage-backed securities. One crucial element in understanding this crisis is the concept of a housing bubble. A housing bubble occurs when real estate prices experience rapid and unsustainable growth, eventually leading to a sharp decline. This phenomenon is characterized by inflated property values, driven by factors such as speculation, lax lending standards, and excessive optimism.
For decades prior to 2008, real estate prices in the United States had been on a steady rise, with intermittent slowdowns primarily attributed to changes in interest rates. The demand for homeownership was fueled by government-sponsored programs, creating a widespread belief that owning real estate was synonymous with achieving the American dream.
The expansion of mortgage availability played a pivotal role in the crisis. Programs offered by entities like Fannie Mae and Freddie Mac aimed to make homeownership accessible to a broader range of consumers. While these initiatives had positive effects, they also had unintended consequences. The influx of funds into the housing market reached some homeowners who, unfortunately, proved to be irresponsible in meeting their mortgage obligations.
The mid-1990s and early 2000s saw interest rates at affordable levels, further promoting homeownership. However, this prolonged period of price appreciation was unsustainable, mirroring the dynamics of other investments. The bubble burst when the subprime mortgage market, constituting 20% of the total market in 2006, began to show signs of distress. Banks heavily invested in subprime mortgages faced a surge in late payments and defaults in early 2008, triggering a domino effect.
Financial institutions, including those like AIG, which had insured these risky mortgages, faced significant losses. Lehman Brothers and Bear Stearns, major players in underwriting, owning, and selling mortgage-backed securities, witnessed a precipitous drop in the value of their assets, leading to their collapse.
The aftermath of the crisis was marked by increased foreclosures, causing a decline in the values of nearby homes and initiating a chain reaction across the nation from 2008 to 2010. The evidence of subprime mortgage defaults, the interconnectedness of financial institutions, and the ripple effect on the broader economy paints a comprehensive picture of the complex factors that contributed to the 2008 housing market collapse.
