Causes and Casualties of the 2007 Housing Crisis in the US

Causes and Casualties of the 2007 Housing Crisis in the US

The housing bubble of 2007 was a costly lesson that changed the lending world for good. Nowadays lenders are more prudent than ever to ensure the same mistake does not happen again. However, it is still not entirely clear which factors contributed to the crisis the most, and there are misconceptions about the key causes. So, it would be useful to re-examine the whole ordeal and ascertain how it influenced the market we have today. Moreover, these are valuable lessons to policymakers and key lenders in the industry, as well as a cautionary tale for future borrowers. 

The number one mistake

Some sources like the Watcher indicate that the main cause of the crisis was a desire to capitalize on a tempting business opportunity. There was a massive sense of urgency to lend funds to homebuyers without thoroughly examining their ability to repay the loans. Due to this hype, the mortgage finance market began to grow rapidly, as more and more people were eager to lend money. There were trillions of dollars pouring in during 2004, 2005, and 2006, and these were all non-traditional mortgages also known as NINJA mortgages (No Money, No Job, and Assets).

In other words, these lenders brought resources that typically did not go towards mortgage costs, which gave access to credit to individuals who had bad or low credit score. This is why the whole deal became a lot riskier. 

Another overlooked factor

It is important to note that unfit borrowers were not the only ones responsible for the crisis. The blame also goes to investors who wanted to take advantage of lower mortgage rates, as they basically added fuel to the whole market pyre. In other words, saying this was an event caused by moderate and low-income players is not true, all risk-takers were involved, and the aftermath was felt across the board. Furthermore, some of the people lied when they listed themselves as owners or occupants of the home they financed, where in fact they were investors.

In 2008 the number of seized homes was really high which created a massive opportunity for investors, but caused real estate prices started to plummet, which meant that another crisis was looming. With lower prices, the value of other properties would start to go down, and it is a complicated chain-reaction with no end in sight, and there would be no winners. Wall Street managed to put an end to it, and bought the homes and rented it to the former owners.  

The effect on the urban areas

Over a decade has passed and the housing prices were adjusted to a degree, but in places like Las Vegas, Calif, and Mayers, the housing market still suffers, and there are still people who are underwater in terms of their mortgage and continue to pay. It will take more time for the market to recover in those places. 

The prices of homes there would go down if there was an increase in supply, but at the same time the costs are responsible for lower demand, and since the demand is low the prices go up. Furthermore, the grip on the lending market is now tighter than ever and it is not easy for millennials to become a homeowner since the necessary credit score for loan approval is pretty high. Truly it was an event that will continue to echo through time, and according to some analysts, a massive shift might also be possible during the 2020s.  

Kevin