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While many predicted the current collapse of the real estate market, others were taken by surprise when the market that had left plenty of opportunity in the last few years for profit began to tumble.

Certainly, one of the leading events that eventually resulted in the crash of the real estate market was the crumble of the subprime market. As a result an unfathomable amount of companies suddenly were suddenly facing foreclosure. Even those companies that were not forced to declare foreclosure found they had suddenly lost billions of dollars.

Reports regarding the subprime market crash have been splashed all over the news. While these events have affected most property owners, most are still uncertain how it all happened.

Just a few years ago subprime mortgages were a great advantage to many property buyers. Buyers who were interested in taking advantage of the hot real estate market but who lacked good credit histories were able to take advantage of subprime mortgages in order to obtain loans. The underwriting guidelines for these loans were generally more lax than traditional mortgages. This allowed even buyers with poor credit to obtain a loan. In exchange for making a loan to buyer with less than stellar credit, lenders were able to charge a higher rate of interest. In addition, so the theory went, lenders relied on the belief that they would be able to foreclose on property and sell it for a profit in the event the borrower defaulted on the loan.

Money to fund these loans came from a wide variety of sources. Extremely low interest rates made it possible for lenders to borrow money themselves and then loan it back out to subprime home buyers. Sometimes, the money was received through more complicated channels. One of these ways is by governments borrowing money from central banks. This is particularly common in the United States.

At the time the housing market was stable. In fact, the housing market was experiencing a high that had not been seen in quite some time. Beyond the fact that many homebuyers were taking on massive amounts of debt there also existed another problem. Due to the health of the real estate market at the time, in many cases there were expectations regarding future growth that in hindsight now appear to have been unrealistic.

2005 and 2006 saw the last of the housing boom. During that time and prior, lenders were throwing loans at anyone with a pulse. These subprime loans were tremendous cash cows for lenders. Problems began to occur when interest rates began to rise from previous record lows. Historically, rising interest rates have had a negative effect on the housing market. Low rates(cheap money) help produce demand and high rates tend to cause prices to fall. Up to mid-2006 the construction market could not keep up with increasing demand. At mid-year the demand began to fall. It was at this point the number of defaults and foreclosures began to mount.

Before long many mortgage lenders began to find it difficult to obtain money from their previous sources of funding. As a result, would-be buyers discovered that loans were no longer as easy to obtain due to the fact that money was no longer as widely available. Additionally, investors suddenly became wary of taking on risk and underwriting guidelines grew stricter. Homeowners who had taken out loans with adjustable rates began to find it difficult to meet their mortgage payments as interest rates continued to rise. More stringent underwriting guidelines meant they were unable to refinance to fixed rate mortgages in some cases. As a result, defaults continued to rise; fueling the massive rash of foreclosures.