What led property market to collapse

Everyone knows nowadays that many people are losing their homes and the property market tends to freeze.  However, banks are still gaining enormous profits after the bubble bursting in the real estate market.

In the 1990’s, banks adopted a huge marketing program in order to encourage people to take their savings out of their homes or deposits and spend it, purchasing consumer goods, making home improvements or going on vacation. Then, credit institutions proceeded to appraise homes and other properties over their actual value and provided people funds up to 125% of property’s “fair” value. When the bills tended to become too big, people just refinanced or borrowed on an equity loan with direct consequence enormous revenues of interest and fees for the banks.

In addition, in times of affluence many ordinary people became investors purchasing houses and offer then as rental property.  This was an intelligent strategy for tax saving, providing a nice place to live for a reasonable monthly rent, to people who couldn’t afford a property purchase. The appreciation on the property and having someone else helping you cover the loan payments were undoubtedly two extra benefits.

The problem was that an important amount of money people used to invest, came from home equity loans that they had taken out on their primary residences. The banks, to overcome this difficulty, provided “second mortgages” with high fees and included prepayment fees and penalties to ensure they made a high profit. Later, when the prices slipped and the appreciation never came, people lost money on the rentals and it resulted in losing on their personal residences too, because of the home equity loans.

Now, a significant number of homeowners owe more than the home could be sold for, letting the house go back to the bank.  However, there is still a small percentage of foreclosures, as banks can sell the houses only for half of their “fair” value.  This event further devalues market prices of the other homes that are for sale, leading the market in a downward spiral of recession.