The 2003-2006 market boom created the perfect storm for 2008. There were multiple factors that lead to this financial meltdown and unique situation in which housing caused the recession. Here’s what happened and why that situation was so unique:
We had loans then that we don’t have now. You could get a loan with no down payment, interest only, pay option ARMs, stated income, no job, no asset verification, negative amortizing loans and low credit scores. So, you could take $20,000 cash off your credit card and deposit in your checking account and state your income is $20,000 a month. You could take a loan for significantly more than you qualify for pick your payment and what you can’t afford just gets tacked on to the back end of the mortgage. The standards to qualify for a mortgage we almost non-existent.
The sub-prime mortgage market had essentially taken over with risky, adjustable rate mortgages. Not only were homeowners getting these kinds of loans, these mortgages were being sold as a higher grade investment than what they actually were. Investors were buying mortgage backed securities. As the markets started to slow and mortgages started adjusting significantly upward, affordability declined and there wasn’t enough equity to refinance.
As if this wasn’t enough, there were a couple other big factors. Builders were putting up as many houses as fast as the could. They overbuilt and saturated the market with too much supply. The supply was down in 2006 because there were fewer household formations. The U.S. averages 1.7 household formations a year when kids grow up and move out. The average age of beginning a new household formation is 33. There was a significant population decline in 1973, so on top of a surplus of supply the demand was out of balance.
It was such a house of cards, the entire market started imploding.
