Financial Crisis: The housing bubble, Part II

Still talking about bubbles, this time going a bit more into detail regarding the housing bubble.

So, what was this housing bubble?

Due to the economic background, house prices were rising steadily. Houses turned into great investments + you could live in them, you know.

Of course, financial institutes noticed this trend, and started to exploit this investment opportunity. People wanted to buy homes. How will they buy homes?

Loans.

Uh-oh.

 

Banks started to issue more and more loans for houses, because houses are great investments, right? What could possibly go wrong?

More and more people who didn't really qualify for a loan got a loan anyway. This contributed to the financial crisis a lot as well, I'll be talking about this in a later post.

However, after a while, house prices started to decline.. Homes weren't a great investment anymore, and you had a bunch of people, who couldn't possibly pay back their loans, with homes that are losing their value.

Pop goes the bubble. A lot of people couldn't affor their loans anymore, they lost their homes - meanwhile banks didn't get their loans back. Financial crisis in the making.

Financial Crisis: The housing bubble, Part I

Whenever you hear about the financial crisis, you always get "housing bubble" thrown into your face.

This housing bubble was one of the main reasons the financial crisis happened, thus it is really important to cover it in our educational series of the financial crisis.

What exactly is a bubble?
Imagine a bubble. It rises and rises, floating higher and higher. Then, suddenly, without any warning, it pops. Boom goes the bubble.

Now, imagine this same scenario with something regarding finances. It's basically when a "thing" shows something promising (for example the real estate market), keeps growing and growing, and then, without any warning, it pops, and causes everything to crash with it.

Other than the housing bubble, there was a dotcom bubble that you may've heard of. This started when the internet became more and more widespread, and people kept investing in ".com" companies that really had nothing to back the great financial support they were getting. This, of course, was discovered later on, and caused all those companies to crash. Pop goes the bubble.

In part II I'll talk a bit more about the housing bubble itself.

The economic crisis

In the next few weeks, I'll try to give you a basic overview about the economic crisis from a few years prior. It has many stages, and many events that need to be understood to have a full understand about what exactly happened when the "shit hit the fan".

Staying true to the blog's title, I'll make it "noob" friendly, and try to explain it as simply as possible. Topics will include stuff like bubbles, credit ratings, etcetera.

I hope it'll turn out to be really educational!