Property bubble -> Subprime Mortgage Crisis -> 2007-2010 Financial Crisis



Before the 2007–2010 financial crisis, a major event that happened was the US subprime mortgage crisis. Subprime mortgage delinquencies and foreclosures rose, resulting decline of securities backing mortgages.

Interesting source of references:

Home values history, plotted by a Yale economist.

Theories on factors contributing to housing bubble (CC-BY-SA-3.0, released under the GNU Free Documentation License)

The domino effect when housing prices declined:

President Bush in his address to the Nation (September 24, 2008) on the riple/ domino effect:

• Housing Market: as the housing bubble burst in late 2006 and prices declined, mortgage holders counting on home price appreciation found themselves unable to pay their mortgages. Rates on adjustable-rate mortgages increased. Mortgage payment delinquency rates and foreclosures increased. With an oversupply of homes, housing construction declined. Housing value declines meant consumers had less money available for consumption. This placed downward pressure on economic growth, increasing the risk of recession.
• Financial Market: Mortgage-backed securities (MBS) derive their value from housing prices and mortgage cash flows. As these cash flows declined or became uncertain, financial institutions and investors holding MBS faced large losses. In certain cases, they had to sell these assets to pay off margin calls. Bank capital available for lending declined due to these losses. Several major banks and dozens of mortgage companies went out of business. Loans became more expensive (higher interest rates) or unavailable to those without stronger credit. Compared to the boom period, credit became considerably less available, placing downward pressure on both consumption and business investment.
• Government responses: Central banks have lowered interest rates to stimulate economies and make it more profitable for banks to loan. Tax rebates (stimulus package) were provided to U.S. taxpayers. Homeowners received assistance with re-financing their mortgages. Individual firms received bailouts and in September-October 2008 a comprehensive, global solution to "recapitalize" banks (e.g., to provide taxpayer funds in exchange for periodic dividend payments) was implemented. It is important to note that government actions took place throughout the 2007-2008 period, not just after the financial market impacts indicated. For example, the Federal Reserve lowered interest rates several times during various stages of the crisis.