Collapsing home prices from subprime mortgage defaults and risky investments on mortgage-backed securities burst the housing bubble in 2008.
Real estate prices rose steadily in the United States for decades, with slowdowns caused only by interest rate changes along the way. Prices increased over time as demand for homeownership through government-sponsored programs increased, along with the general sentiment that owning real estate represents the American dream.
Mortgages became available to a wider range of consumers with programs offered by Fannie Mae, Freddie Mac, and others, which may have put money in the hands of some irresponsible homeowners who would later default on payments. Interest rates remained in an affordable range throughout the mid-1990s and early 2000s, making homeownership even more affordable. As with other investments, real estate couldn't possibly appreciate year over year at such a pace forever, and soon the bubble burst.
What Is a Housing Bubble?
The collapse certainly didn't happen overnight, but loud rumblings started to occur as subprime mortgages—those made to consumers with less-than-perfect credit—became 20% of the market in 2006. Some banks made subprime mortgages their entire business, and in early 2008 they began to see late payments and defaults in such high numbers that many banks collapsed.
Heavy subprime portfolios quickly brought down insurance companies such as AIG that had insured these mortgages. Pools of mortgages used for investments were defaulting, and institutions such as Lehman Brothers and Bear Sterns that underwrote, owned and sold many such investments saw drops in value so great they not only had to shut their doors but also brought down others. Meanwhile, the increased foreclosures began to bring down values of nearby homes, and the chain reaction spread across the country from 2008 to 2010.