The fluctuations of the United States housing market in the last few years have been perhaps the worst case of a real estate bubble bursting anyone has seen in recent memory. The economic collapse that resulted (at least in part) from the real estate market’s failure is the single biggest economic meltdown since the Great Depression of the 1930s – and that crisis was caused by stock market speculation, not real estate. Understanding the cause and history of the real estate collapse can be incredibly helpful to practicing responsible personal investment in the future.

Early Rumblings

Because of investment speculation, there is actually only slight correlation between population size and housing costs. And, because the differences between responsible investment and rampant speculation are often only discernible after the fact, it is almost impossible to identify a bubble during the fact.

The true beginnings of the housing market problems began as banks began to issue so-called subprime rate mortgages. These subprime mortgages were issued by lending institutions such as banks to borrowers who do not qualify for other loans, usually because of low income, bad credit history, or a high loan-to-value ratio. In short, these mortgage loans were very high-risk.

Market Corrections

For somewhat independent reasons, housing prices tapered off in 2005, after which many banks became forced to foreclose on a record number of houses. These foreclosures caused the companies which had issued the subprime mortgages to begin imploding, losing much of their value almost overnight.

These fluctuations caused a full-on market correction – a short-term price decline. In a sense, a market correction puts a boom economy’s fluctuating values in line more with real-world values. The National Association of Realtors, in explaining the timeline of events, found that the timeline went something like: