Why Did America’s Property Bubble Burst? Here Are 8 Reasons…

Why Did America’s Property Bubble Burst? Here Are 8 Reasons…

Housing Bubble!

The global property markets are imploding, and fast. The strain that first found its footing in the U.S has now truly gone viral. From Dubai to Denmark, developers have been left reeling, while national exchequers struggle to hold ground. So, how did the housing market bring the greater world economy to its knees? What could have possibly happened that real estate the world over saw $5.4 trillion in losses over the course of one single year alone (2008-2009)? We here present a simple, 8-point lowdown on what really got that demolition ball rolling.

1. There’s a reason why it’s called a debt-fueled crisis

When credit flows run deep and wide, even the U.S. subprime are fair game. As interest rates were contrived to be at unreasonably low levels, the most coveted of properties now seemed to be within the average mans checking account. With more buyers thronging the market, prices soared, and real estate seemed like the cheapest way to make a quick buck (or many!). The home flipping soon ensued, and as bidding wars got heated, speculation ran rife, causing the so-called housing bubble to finally take shape.

2. Hysteria takes over

According to Robert Schiller; one of the telltale signs of an emerging bubble is the great enthusiasm with which the public receives news of compounding prices. The same held true here; the markets unfaltering ascent almost blinded people into thinking that a reversal of fortunes was only something that happened in movies. Even smart buyers were lured into the mix believing that soon prices shall become too restrictive for them to realize their dream of homeownership.

3. Bad assets packaged as safe bets

High on financial innovation and confident that non-stop gains in property values would not even deter the unemployed from servicing mortgage payments, banks practically handed out wads of cash to visibly distressed borrowers. With no down payments or spotty credit histories to worry about, buyers rushed to cash in on their ever-growing equities, sometimes taking out two-three loans on the same property.

4. Listings are big money

U.S. realtors make bank every time a home is sold, the higher the price, the larger their profits. So, as prices began to peak, real estate agents saw to negotiate the biggest bids, whereby driving offers even further. Prospective buyers were made to raise their bottom line several times with promises of investments being foolproof and immune to any decline.

5. Buy goes the telly

The real estate sector is a huge buyer of ad-space, and during the boom leading industry professionals such as developers and mortgage companies, regularly funneled in millions in advertising to keep the buying frenzy going.

6. Big profits attract big fraud

As lending practices became more questionable, a number of fraudulent mortgage vendors set up shop, and practically flooded the market with non-existent buyers. Forged signatures, and illegally acquired personal information were used to close deals to rake in additional profits at the expense of unsuspecting homeowners.

7. Prime equity does not mean prime income

Those investors looking to rent out newly bought homes were soon disappointed upon finding that rental incomes fell far short of their monthly mortgage payment. As more and more buyers woke up to this realization, demand cooled off (and then dried out completely) as the bubble was dealt with hefty blows.

8. Foreclosures spell death

With homeowners defaulting at record rates, foreclosed houses flooded the market, deeply upsetting the prevalent pricing structure. Buyers took heed and began to head out in droves. The bubble was now set to rupture.

Photo Credits: zzub nik via Flickr