The Federal Reserve has recently been lowering interest rates in order to combat issues involving the real estate market. Prices of homes are falling to the point that the houses themselves aren’t worth as much as the buyers’ mortgages.
Sub prime mortgages are a big factor in what is going on in real estate right now. Basically, banks starting giving out loans to potential homebuyers with less than perfect credit at a higher interest rate than their high credit rating counterparts, allowing them to buy homes that they would not have been able to purchase otherwise. This happened during a period when the Federal Reserve had interest rates fairly low. When the Fed later raised interest rates with the fluctuating economy, many of these homeowners found themselves unable to make the payments on their homes.
A substantial amount of these people had no other choice but to foreclose on their homes, or worse, simply walk away. Now, with the price of homes floundering, banks are left not with interest yielding mortgages, but depreciating homes, losing money.
With the sub prime mortgages allowing so many more people to buy homes, houses were being constructed in record numbers. Unfortunately, now there are entirely too many homes on the market, and not nearly enough buyers. This excess of housing is causing the prices of homes to fall, which furthers the vicious cycle.
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