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A capital crunch is essentially the same thing as a credit crunch

. There is generally a lack of available equity capital, which restricts lenders' capacity to make loans, and is most evident in sections of the country where the subprime mortgage and financial crisis have been most felt. In a credit crunch, lenders keep the capital they have instead of loaning it out because they are afraid of not being repaid due to increasing numbers of job losses, mortgage defaults, bankruptcies, and other factors that increase the risk of defaults on loans.

The effect on the real estate market is that there is less money available for mortgages. With the lack of money to fund mortgages, an excess supply of homes for sale develops. And this in turn means that construction of new homes will be slowed or even stopped altogether because builders cannot sell the homes they have built. This was seen in some areas of the country where bankruptcies and foreclosures added to an already glutted real estate market.

Job losses, foreclosures and bankruptcies led to people getting negative marks on their credit reports, which led to low credit scores. Low credit scores make it much more difficult to obtain credit and to get good terms on loans. Besides this, with increasing defaults, bankruptcies, and foreclosures, banks started to tighten up their lending standards to the point that they became far more restrictive than was typical .

Borrowers who normally would have been approved for mortgage loans were unable to obtain them. This only increased the over saturation of houses in the real estate market, since individuals who should have been capable of buying a house were unable to do it. The oversupply of homes in the real estate market has to work itself out in order for things to pick back up, but it is taking longer to do so because of several factors, including overly restrictive mortgage lending policies.

Yet another negative impact on the real estate market has proven to be the corrections in price, as some regions have seen home prices plummet in the amount of 25% or even higher. For some, the value of their home fell so dramatically that they found themselves owing more on the mortgage than the house was worth, which prompted them to quit making their mortgage payments and therefore fall into foreclosure proceedings rather than to remain in such a condition.

Any purchaser having difficulty getting financing is best advised to remain calm and not panic. They need to keep doing whatever they can to repair their credit and increase their credit rating. As restrictions ease, they will find it easier to qualify for a mortgage loan, and they will eventually get into the house that they want.

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by: Logan Oulman

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