Long-term causes of the Great Recession of 2007-2009
There were signs of the growing bubble in real estate long before 2007. In the ten years before the crash some bankers saw the rising problem and opted out of the subprime mortgage market. House prices were inflated, lending practices were lax, and homeowners were taking on too much debt. Warren Buffet called the situation “‘mass delusion’ shared by ‘300 million people’”
Bursting of dot.com bubble led to real estate as the next investment opportunity. The rising cost of real estate and the ability to acquire a home with no down-payment encouraged people to count on the increase in home value to protect their investment. The ability of banks to sell mortgages in the subprime market meant they only cared about collecting fees, not the ability of the borrower to repay the loan. Non-traditional loans, like interest only loans, began to appear and lenders were encouraging people to take on debt and even falsifying loan application documents where no one was verifying income or credit worthiness.