When Did the Real Estate Market Crash?

In short, most economists have looked back at the data and concluded that the United States real estate market crashed in 2007. But this is oversimplified. The full answer is much more complex.

The main factor that is attributed to being the cause of the real estate crash is the collapse of the subprime market. This coupled with house prices peaking in 2005-06 and dropping starting in 2006 was the beginning of the end.

The housing market crash really began as early as the beginning of the 21st century when the dot-comers were starting to default on their low-documentation loans. Self-employed people had to start demonstrating more to qualify for loans. This left many without being able to borrow over the next ten years.

As home values started to decline and people were defaulting on their payments, the spiral downward was launched. Lenders were becoming increasingly stingy on how much they were loaning out. They also started increasing the amount of down payment required.

In 2006, with the prices falling and an excess of inventory, construction starts fell, too. This is the same year that foreclosures started to spike, rising 42% from the year before.

2007 was the watershed year. The US Treasury said that the housing decline was the biggest risk to the health of the overall economy. During 2007 the drop in existing home sales was the worst since the 1989 economic struggles. It was also the worst year since 1991 for prices – it was the first decline in prices for two years in a row since then.

Further hampering things was the fact that over 25 subprime mortgage lenders declared bankruptcy or posted large financial losses in 2007. Banks were borrowing from banks. The credit crunch that resulted from the business closures was the result of investment portfolios including those companies.

By the end of 2007, home sale prices were plummeting at a high rate. Some markets saw homes lose half of their values. In early 2008, the National Association of Realtors said that existing home sales were the worst they had been in 25 years. The term “bail-out” was starting to become common.

At the same time, mortgage fraud was being investigated, leading to the arrests of 406 people in the spring of 2008. Members of Congress were exposed as having received some sweetened mortgage deals. The gloom that dominated the evening news led to a loss of economic confidence. Without confidence, the downhill slide was inevitable. We humans tend to dislike risk, and the housing market was becoming increasingly risky.

At the end of 2008, foreclosure rates were up 81% from 2007. There was no stopping the global recession that would start as a result of the housing collapse.

So while it had been a storm brewing for several years, stating that the housing market’s demise was in 2007 is accurate. But as we have seen, there are many factors that go into it. The housing market does not stand alone and independent. Thinking positively, this market, like many other financial markets, is cyclical so it will rebound. There will also be a future downturn, but it will rebound again.

When Did the Real Estate Market Crash?