The U.S economy recorded the worst crash in housing prices in the year 2007. Until 2006, the so flourished real estate saw its doom. This shocked the entire world. The fall of U.S real estate affected other parts of the Country also. Housing bubble refers to fail in speculation of prices. The consumers who expected the housing prices to hike suddenly saw the fall in prices due to their miscalculations in speculation. There are a lot of players in between who tried to play tactfully but then failed. Let us see how the U.S credit bubble broke.
The U.S Financial crises.
When there is a tremendous supply supplemented by a shortage in demand is when the bubble would burst. In 2003, the real estate started to bloom in the U.S. When people buy a large amount of money from banks to invest in homes; the banks hold a piece of paper recording the financial proceedings referred as a mortgage. Now, in 2003 almost all the creamy, rich layer in the U.S owns a house. If the homeowner defaults on the payment of loans, the banks have the free will to sell this house to another third party. The financial institutions thought it would be a great idea if the people default on loans. Keeping this in mind, the banks started lending the loans to customers with low income who had very high chances of defaulting on the loan. This is called subprime lending. In 2007 many homeowners default on their house loans. Their home gets taken away by the banks and is sold to a third party. Banks make huge amounts of profit. What the U.S did not anticipate was that if all the people were going to be house owners and if more than 30% would default on the loans then soon there would be a lack of demand with excessive supply. This is exactly what happened. When consumers started to default on loans, more house was put up for sale. There was enormous supply. Since most of the people were already homeowners, they hesitated to buy another house
The bubble burst.
When this happened, most of the investors (third party) refuses to invest in homes as their prices slowly started to decline. In December 2007 there reached a stage wherein there was house to supply with a serious lack of demand. The real estate prices fell. The so speculated theory failed.
How did housing bubble affect the rest of the world?
Most of the Countries having a trade relation with U.S.A were affected. Due to the failure of the economy, they stopped imports from other Countries. Their exports fell. U.S economy faced depression in their economy restored after the crises.