The US Housing Market and the Subprime Mortgage Crisis (A)

From 2006, the real estate markets in several regions in the US saw price declines, after witnessing double-digit growth rates between 2000 and 2005. This decline in house prices, together with rising interest rates, seriously affected the subprime mortgage borrowers – a class of borrowers who on account of their poor credit histories were not eligible for prime loans - with several of them failing to make payments on their mortgage loans. Given that the subprime mortgage market⁹ had surged from $120 billion in 2001 to $600 billion in 2006 and accounted for a significant share of the mortgage market, the high rate of defaults in subprime loans was seen as an indicator of the worsening situation in the housing market and the US economy as a whole.

However, from mid 2004, with increasing interest rates there was a decline in house sales, and home owners with flexible rate subprime mortgage loans were not able to pay the higher interest charges.

With increasing interest rates and falling house prices, they also could not refinance their existing mortgages¹⁰.

As a result, there were a large numbers of foreclosures¹¹ which led to an increase in the supply of houses resulting in a further decline in house prices. The increasing number of foreclosures led to a tightening of credit in the real estate market by end 2007.