The USA housing bubble wasn't something that popped out of a box one day. It was building up for the better part of the decade, but it still came as a shock. The subprime mortgage crisis and the real estate market crash were quickly followed by a severe credit crunch. With loans drying up, consumers stopped buying and the vicious cycle spiraled into the Great Recession of 2008-09. From 2007 to 2010, tens of millions of people lost either their homes or jobs or both.
The roots of this crisis go back to 2001, to the dot com crash and 9/11. This deadly combination knocked the stuffing out of the economy and the only thing people had left to maintain their lifestyles was home equity. Congress deregulated the banks and the Federal Reserve kept interest rates low, thus allowing mortgage lenders to shovel money out the front door to all comers.
The result was that speculators started buying homes just to make a quick buck. Even for ordinary home owners, it was easy to take out equity loans and second mortgages so that they could enjoy the fruits of the housing boom. According to BLS (Bureau of Labor Statistics) data, non-farm payroll employment for residential construction jumped 29.1% from 2001-06. Employment among loan brokers jumped nearly 120% during the same period, and the real estate credit industry grew by 52%.
Speculation fueled by irrational exuberance is what the FED is there for. They could easily have kept it under control by increasing interest rates. Instead, they did nothing until it was too late. Wall St. Was knee deep in derivative products created from these subprime mortgages. The lenders had created mortgage packages graded by the credit ratings agencies and then handed them off to investors.
Private equity funds began using it to setup massive leveraged deals where companies were wildly overvalued and the only security the banks had was these worthless mortgage papers. Everybody was in on the systemic fraud, and share values and home prices kept climbing. When the bubble finally collapsed in 2007, the banks were left mortgages in default and bankrupt companies which had been valued at billions just a year or two before.
By this time, home values had tanked so much that even ordinary people who had nothing to do with the mess found their home loans underwater. From 2006 to 2009, the real estate industry lost all the gains for the entire decade, and then some. Employment in residential construction dropped 36.6% and home loan credit companies started laying off employees so fast they lost 44% of the workforce in the same period.
Faced by a credit crunch and delinquent home owners, the banks panicked and sent out millions of foreclosure notices. Nearly 8 million homes were ultimately foreclosed in 2009-10. Over 10 million homes were still underwater in 2011, poised on the edge. The federal government has now forced the five biggest banks to spend $25 billion to help out everyone who lost their homes due to The USA housing bubble.