page_title: United States housing market correction
section_title: Major downturn and subprime mortgage collapse, 2007
hierarchical_section_title: United States housing market correction / Major downturn and subprime mortgage collapse, 2007
caption_attribution_description: English: Unfinished housing development outside of Houston. From http://recessionhouses.blogspot.com/
context_page_description: United States housing prices experienced a major market correction after the housing bubble that peaked in early 2006. Prices of real estate then adjusted downwards in late 2006, causing a loss of market liquidity and subprime defaults
  A real estate bubble is a type of economic bubble that occurs periodically in local, regional, national or global real estate markets. A housing bubble is characterized by rapid and sustained increases in the price of real property, such as housing' usually due to some combination of over-confidence and emotion, fraud, the synthetic offloading of risk using mortgage-backed securities, the ability to repackage conforming debt via government-sponsored enterprises, public and central bank policy availability of credit, and speculation. Housing bubbles tend to distort valuations upward relative to historic, sustainable, and statistical norms as described by economists Karl Case and Robert Shiller in their book, Irrational Exuberance. As early as 2003 Shiller questioned whether or not there was, "a bubble in the housing market" that might in the near future correct.
context_section_description: The White House Council of Economic Advisers lowered its forecast for U.S. economic growth in 2008 from 3.1 per cent to 2.7 per cent and forecast higher unemployment, reflecting the turmoil in the credit and residential real-estate markets. The Bush Administration economic advisers also revised their unemployment outlook and predicted the unemployment rate could rise slightly above 5 per cent, up from the prevailing unemployment rate of 4.6 per cent.
  The appreciation of home values far exceeded the income growth of many of these homebuyers, pushing them to leverage themselves beyond their means. They borrowed even more money in order to purchase homes whose cost was much greater than their ability to meet their mortgage obligations. Many of these homebuyers took out adjustable-rate mortgages during the period of low interest rates in order to purchase the home of their dreams. Initially, they were able to meet their mortgage obligations thanks to the low "teaser" rates being charged in the early years of the mortgage.
  As the Federal Reserve Bank applied its monetary contraction policy in 2005, many homeowners were stunned when their adjustable-rate mortgages began to reset to much higher rates in mid-2007 and their monthly payments jumped far above their ability to meet the monthly mortgage payments. Some homeowners began defaulting on their mortgages in mid-2007, and the cracks in the U.S. housing foundation became apparent.
caption: Incomplete housing development near Houston, Texas.
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