Housing Component of the Financial Crisis

The origin of this financial crisis lies in the housing market.  For the past 15-20 years, the housing market has been increasing.  Since people expected the housing market could increase indefinitely, people would take out loans that were beyond their means to actually pay and only pay interest.  They would wait until their house went up in value and then either sell it or refinance (take out another loan) to pay off the initial loan.  However, when the housing market started turning downward and prices decreased, these people could not sell their houses at a higher price and therefore couldn't afford to pay off their loans.  These subprime loans (or loans given to people with a high risk of defaulting) that were widespread in the years leading up to this crisis, especially because of institutions like Frannie Mae and Freddie Mac which made it easier for the public to obtain loans.  When people began to default (refuse to or declare that you are unable to pay) on their loans, banks were not getting the cash (liquidity) that they rely on to perform regular business.  This directly led to the liquidity crisis we are experiencing today.