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The Demise of the Sub-Prime Market in 2007

Posted by  on Apr 16, 2009
 
Considering how prices dipped for housing in 2007, it was not difficult to see what was on the horizon. Smaller price tags enticed new home owners into making their first purchases; however, their credit histories weren't always as ready as they felt they were. Perhaps they had a lot of credit card debt or they simply did not have much money. Whatever the reason, the evolution of sub prime lenders had begun, and, you did not need a crystal ball to predict the results.

What are Sub Prime Lenders?

When new home buyers entered the market, they were not the ideal applicants for loans. Many did not have good credit history, have had bankruptcies, high credit card balances, or other marks on their credit records, making them less than ideal applicants for home loans. However, sub prime lenders offered home loans to these applicants despite these issues. While this seems like a strange financial arrangement, the sub prime lenders were looking out for their financial gain.

By offering these loans to those that could not get loans anywhere else, the sub prime lenders were able to offer loans with much higher interest rates, meaning that the lenders were going to be making a lot more money off their agreements. On the other hand, the borrowers were going to have to pay these higher loan amounts back.

What Happened in the Sub Prime Market?

There are several things that happened in the sub prime market in 2007. The year began with higher values for homes, leading people to want to sell their home quickly. They put their homes on the market at higher prices, but with the slower economy, people were not buying homes as quickly as they may have in the past. Consumer confidence was lower, meaning that people were less than likely to purchase a home because hey saw it as a financial risk. Thus, these sellers needed to lower their home prices, leading to a buyer's market.

So, more people wanted to buy homes, but they did not have the money to do so. This is where the sub prime lender enters the equation. These lenders jumped in and helped these high risk borrowers get into the housing market. But since these borrowers didn't have the financial skills to manage the higher interest rates, they often defaulted on their loans, causing the sub prime lenders to lose out on profits they would have made if the borrower had been able to keep up on their part of the contract.

The increased number of foreclosures on homes drove the housing market even further into the buyer's market as sellers were unable to sell their homes for the actual values.

What Happens Next?

There's no way to determine what will happen next when it comes to the housing market, but it seems that the best guess is that housing prices will start to climb again as the homes now being sold for lower prices are taken off the market. As the supply of available homes begins to diminish, the homes will increase in price, causing the buyers to be less likely to make risky loan arrangements — like those in the sub prime lending market.

If you are someone that may only qualify for a sub prime loan, you might want to start thinking about fixing your credit report to help you qualify for a more traditional loan in the future. This means making your bill payments on time, reducing your credit card debt, and starting to save for your down payments. Before long, you will become the ideal home loan candidate.

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