subject: Causes And Timeline For The Usa Housing Bubble [print this page] The USA housing bubble wasn't something that popped out of a box one day. It was building up for the better part of the decade, but it still came as a shock. The subprime mortgage crisis and the real estate market crash were quickly followed by a severe credit crunch. With loans drying up, consumers stopped buying and the vicious cycle spiraled into the Great Recession of 2008-09. From 2007 to 2010, tens of millions of people lost either their homes or jobs or both.
The roots of this crisis go back to 2001, to the dot com crash and 9/11. This deadly combination knocked the stuffing out of the economy and the only thing people had left to maintain their lifestyles was home equity. Congress deregulated the banks and the Federal Reserve kept interest rates low, thus allowing mortgage lenders to shovel money out the front door to all comers.
People were buying homes simply because they needed money. The first mortgage was a formality, and then home owners could easily cash in on home equity as real estate values went up. Bureau of Labor statistics say that during 2001-06, the number of people working as or for loan brokers went up 120%. During this time, the residential construction workforce grew by 29.1% and there was a 52% jump in the number of people working for real estate credit companies.
Speculation fueled by irrational exuberance is what the FED is there for. They could easily have kept it under control by increasing interest rates. Instead, they did nothing until it was too late. Wall St. Was knee deep in derivative products created from these subprime mortgages. The lenders had created mortgage packages graded by the credit ratings agencies and then handed them off to investors.
Private equity funds began using it to setup massive leveraged deals where companies were wildly overvalued and the only security the banks had was these worthless mortgage papers. Everybody was in on the systemic fraud, and share values and home prices kept climbing. When the bubble finally collapsed in 2007, the banks were left mortgages in default and bankrupt companies which had been valued at billions just a year or two before.
The crisis spread beyond the key players, and ordinary home loans started going underwater as home values kept dropping. From 2006-2009, the real estate sector lost all gains accrued in the first half of the decade. Residential construction shed 36.6 percent of its workers and real estate credit companies laid-off 44 percent of their workforce.
Faced by a credit crunch and delinquent home owners, the banks panicked and sent out millions of foreclosure notices. Nearly 8 million homes were ultimately foreclosed in 2009-10. Over 10 million homes were still underwater in 2011, poised on the edge. The federal government has now forced the five biggest banks to spend $25 billion to help out everyone who lost their homes due to The USA housing bubble.
