The Housing Market Crash of 2007 and What Caused the Crash

Posted on by Tom DeGrace

Housing Market Crash of 2007

The Housing Market Crash of 2007 was the worst housing crash in U.S. history. The Housing Market Crash of 2007 was the cause of the financial crisis. This nearly caused the U.S. to experience another depression like the Great Depression. There are a number of things we can look at to determine how the housing bubble occurred and what happened to cause the bubble to collapse.

The Housing Bubble

The housing market experienced modest but steady growth from the period of 1995 to 1999. When the stock market crashed in 2000, there was a shift in dollars going away from the stock market into housing. To further fuel the housing bubble there was plenty of cheap money available for new loans in the wake of the economic recession. The federal reserve and banks praised the housing market for helping to create wealth and provide a secured asset that people could borrow money to help the economy grow. There was a lot of financial innovation at the time which included all sorts of new lending types such as interest adjustable loans, interest only loans and zero down loans. As people saw housing prices going up, they were stepping over each other to buy to get in on the action. Some were flipping homes in an effort to take advantage of market conditions. If you understand fractional banking, you would know that with a 10% reserve requirement, in theory it would means that 10 times that money can be created for each dollar. With 0% down needed to buy new homes, an unlimited supply of money could be created. With each loan, banks would quickly securitize the loan and pass the risk off to someone else. Ratings agencies put AAA ratings on these loans that made them highly desirable to foreign investors and pension funds. The total amount of derivatives held by the financial institutions exploded and the total % cash reserves grew smaller and smaller. In large areas of CA and FL there were multiple years of prices going up 20% per year. Some markets like Las Vegas saw the housing market climb up 40% in just one year. In California, over ½ of the new loans were interest only or negative-amortization. From 2003 to 2007 the amount of subprime loans had increased a whooping 292% from 332 billion to 1.3 trillion.

The Beginning of the Crash

The housing market peaked somewhere in 2006. We were beginning to see some of the early signs of trouble when some types of subprime loans started to go into default. There wasn’t worry at that time since never in history have prices for housing market gone down nationally. Once the credit markets froze in the summer 2007, things began to deteriorate rapidly. Subprime credit stopped completely and interest rates for credit for other types of borrowing including corporate loans as well as consumer loans rose dramatically.

Timeline of Events for 2007

February: Freddie Mac announced that they were no longer buying the most risky subprime.

April: Subprime lender New Century Financial Corporation files for bankruptcy.

June: Bear Stearns announced a loan of 3.2 billion dollars to help bailout one of its funds that invested in collateralized debt obligations (CDOs).

July: The stock market hit a new all-high over 14,000. On July 31, Bear Stearns liquidates two of its mortgage-back security hedge funds

August: A worldwide credit crunch had begun and there were no subprime loans available. Subprime lender American Home Mortgage files for bankruptcy.  This marked the start of the housing market crash

September: The Libor rate rises to its highest level since December of 1998, at 6.8%.

December: The stock market finishes the year at 13,264.

Timeline of Events for 2008

January 11: Bank of America acquired Countrywide financial for 4.1 billion dollars. Countrywide had a total of 1.5 trillion dollars worth of loans.

March 16: Bear Stearns on the verge of bankruptcy signs a merger agreement with J.P. Morgan to sell itself for $2 a share which was fraction of the current trading price.

May 19: The markets had its final day above 13,000 closing at 13028.

September 6: The treasury announced a takeover of both Fannie Mae and Freddie Mac that had over 5 trillion dollars in mortgages.

September 14: Bank of America signs a deal to acquire Merrill Lynch.

September 15: Lehman Brothers files for bankruptcy. The Dow drops 400 points closing at 10,917

September 17: The federal reserves lends $85 billion dollars to American International Group (AIG).

September 18: Fed Chairman Ben Bernanke and Treasury Secretary meet with congress to propose a $700 billion dollar bailout. Bernanke tells congress “If we don’t do this, we may not have an economy on Monday.”

September 26: Federal regulators seize Washington Mutual and then strike a deal to sell most of to J.P. Morgan for 1.9 billion dollars. This represents the largest bank failure in U.S. history.

September 29: Congress votes down the $700 billion bailout plan. That same day Citigroup acquires Wachovia.

October 1: The Senate passes the $700 billion bailout bill.

October 3: The house passes the $700 billion bailout plan and the president signs it into law.

October 6: The fed announces that it will provide $900 billion in short-term loans to banks. The Dow closes below 10,000.

October 7: The fed announced that it will lend around 1.3 trillion dollars directly to companies outside the banking sector.

October 10: The Dow closes at 8451, the stock market has had its worst week ever losing 22% over the past 8 trading days or 8.4 trillion dollars from the market highs in 2007.

October 14: The Treasury taps $250 billion of the bailout fund and uses the money to shore up the nations top banks.

December 31: There were over 3 million foreclosures by this year. Florida, Arizona and California had rates of 4% with Nevada at 7.3%

The aftermath

Even though the financial crisis was resolved by start of 2009 the housing market continued to decline throughout 2009. There were over 3 million foreclosure filings for 2009. Unemployment rose to over 10% and the housing market crash created the worst recession since the early 1980’s. By the 4th quarter of 2009 the U.S. has experienced significant GDP growth and corporate earnings had increased by over 100%. The Unemployment Rate had stabilized towards the end of 2009. By 2010 housing prices still haven’t gone up and we are still working through a surplus of housing inventory.

8 Responses to The Housing Market Crash of 2007 and What Caused the Crash

  1. calvin says:

    Greed and only greed caused the crashes. Investing is the attempt to make a financial killing, in other words, bigger profits and less work. Why else would anyone with their head on straignt want to make a profit on the backs of others? Thousands of years ago it was determined by one nation that debts should be forgiven every 7 years. Lending money with large interest rates was unfair. It’s in Egyptian and Abrahamic history. But GAMBLERS saw the same things as unconcerned individuals see today. Morality be dammed and me first.

    • Joshua says:

      “Investing is the attempt to make a financial killing, in other words, bigger profits and less work. Why else would anyone with their head on straignt want to make a profit on the backs of others? Thousands of years ago it was determined by one nation that debts should be forgiven every 7 years. Lending money with large interest rates was unfair. It’s in Egyptian and Abrahamic history.”

      It’s also in Christian and Western history. Originally the Jews cornered the market on charging interest on loans and their successful business innovation of making loans for profit is what has led to capitalist growth and the lifting of billions from poverty and starvation globally. Interest isn’t greed, its the time value of money. And modern “targeted” interest rates in the U.S. and elsewhere are government-subsidized giveaways to whomever can qualify for them.

  2. calvin says:

    Employment? (without benefits). Employers get away with it in this country by only hiring part time workers.

  3. Adam Smith says:

    @calvin
    You Marxist piece of shit. What the hell do you think the entire banking industry is based on. Should we throw our money at each other, hoping someone else reciprocates so we don’t have to eat discarded baby fetus? Interest is necessary to compensate for risk, which you would have known if you took your head out of Hegel’s ass and learned some basic financial theory. These subprime loans were the riskiest fucking things on the market, but they were rated AAA. Don’t fucking crucify bankers for being goddamn rational human beings while you complain about society passing you goodbye. Get off the fucking Communist high road and realize some shit about the world and how it works.

    • IdiotSlayer says:

      Umm sorry, but you know nothing relevant about the 2007-08 financial collapse and should do some research before claiming you know anything about financial theory. I agree with you that some interest is fine and fair, but Calvin is quite correct that in this case is was simple greed, gambling and dishonest on the part of your “bankers” that’s to blame. The subprime mortgage risk is not what caused the collapse in 2007-2008. What happened here is that you “bankers” even though they knew that interest rates were only in the 6% percent range, and thus grouping the mortgages together and selling them as investment could only net a profit in that same range (6%) instead claimed that they were worth 10-100 times what they were and sold them as such. Normal (not subprime mortgages) were regulated by law so that your cheating bankers(to be fair this was not all bankers, only dishonest ones) were not allowed to claim that they are worth anything more than the rate of return which is obviously the truthful and correct rate maximum that an investor would see. Sub-prime mortgages the other hand, were not regulated by law and nothing prevented your “bankers” falsely claiming and selling the mortgates as an investement with an expected derivative return many times higher than could ever be possible with the real interest rates.

      If you have any doubts do a few minutes of research and to find out how much the total amount of ALL the sub-prime mortgages were at the time of the crash and the government bailout. This is the proof in the pudding. When the government spent money to bail out the banks, they spent literally more than 5 times the total amount of every single sub-prime mortgage in America. That is, if the sub prime mortgages themselves were the problem at all, they could have simply paid off every single one complete and solved the problem for one/fifth the cost.

      As I was working for National City bank at the time, I know this factually to be 100 percent true.

      Look it up instead believing the political propaganda of rich politicians who would rather that middle class American should have to rent property from them, rather than being able to get mortgages and own property for themselves.

    • James Robert Ray says:

      Get some help if you are still a functioning human. Your diabtribe is a sign of serious dementia.

    • Seth says:

      Someone forgot to take their meds today.

  4. endless says:

    Just watch the best documentary on this by Charles Ferguson it’s titled INSIDE JOB

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