Repercussions of the Fall in Housing Prices I

After years of rising home prices, the U.S. housing market began to decline in 2006.

During the housing boom in the early to mid-2000s, too many houses were built, which added to the housing supply, but demand failed to keep pace. With supply exceeding demand, prices began to fall.

This created serious problems for homeowners. Many had taken out large loans to buy homes at high prices.

As values dropped, they found themselves “underwater”. This means they owed more on their mortgages than their homes were worth. So, many homeowners stopped paying their loans, realizing it made no financial sense to keep paying.

Many homeowners had adjustable-rate mortgages, which started with low interest rates but later reset to higher market rates.

When interest rates increased, so did monthly payments. Unable to keep up, many homeowners defaulted on their payments.

Lenders responded by foreclosing. They took back homes and then sold them.

This created a vicious cycle. More foreclosures meant more houses on the market, pushing prices down further, which caused even more defaults.