The US Real Estate Bubble - Research Paper Example

The cost of a home in almost any state in the United States of America was overpriced by at least two hundred percent. As a result, the middle-income earners could not afford to buy houses with their income, and the only way to buy a house was to secure a mortgage from a bank. As more and more people used mortgages to buy houses, the demand for houses increased, only resulting in a further increment in home prices.

The other thing was that the mortgage providers failed to include due diligence while providing these mortgages. While these mortgage providers advertised strict terms and conditions, these terms and conditions were never applied when giving out mortgages and as a result, many people who were not eligible for such mortgages ended up in the client lists of such banks. When the demand /supply forces forced the interest rates of the mortgages to start fluctuating, most of these mortgage owners started finding it harder to finance their mortgages and some of them had to start refinancing their mortgages. This meant that they had to take a loan to pay their mortgage. In such an arrangement, the problem was that the mortgage owners ended up paying interest twice. This is because the mortgage owners would have to pay for the mortgage as well as the interests on loans.

The very fact that a majority of the mortgage owners were seeking refinancing for their mortgages meant that the real estate industry was already facing major problems. Most of these frustrated homeowners started selling off their homes but at much lower prices than they had secured the homes, and the real estate market was flooded with supply. Those who could not afford to sell the homes were forced to foreclose. Many banks were left with no choice but to foreclose thousands of homes to reduce their losses. Even as the banks foreclosed the homes, they had to resell the houses at very low prices, which led to a number of factors. One, the real estate suffered even more flooding and any remaining demand for homes would now be met by the foreclosed homes that were selling at much lower prices. As a result, the real estate started collapsing from two ends, namely the financing and real estate development side. Read More