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The Real Estate & Financial Collapse

This is our rundown of the real estate bubble and the ensuing crash. The tale goes from investors buying property to Wall Street selling mortgage-backed securities to credit default swaps to near run on banks (like in the movie It’s a Wonderful Life), with the eventual collapse of the biggest thrift bank in the United States, Washington Mutual.

The house of cards fell when big names went under, names that were once revered in the financial arena and were the foundation of Wall Street. Now, such names as Bear Stearns, Lehman Brothers, AIG, and Merrill Lynch are nearing bankruptcy and rushing to find buyers. Fannie and Freddy Mac, two companies that helped spur the real estate growth, were then taken over by the United States government.

Why are we writing about this on our investment properties site? If you’re going to buy real estate you should understand the past to better gauge what might happen in the future. We write this as a warning. Don’t go head over heels for a property – be cautious. Just because you have the money doesn’t mean you have to invest or buy property now. The real estate industry is not a TV infomercial where there’s easy money. Yes, you can make money but there are big risks that can only be mitigated with hard work, solid planning, and wise choices from the start.

The crux of the collapse probably centers on companies becoming over leveraged and not having capital in reserve. The real estate market was the catalyst of the market collapse but Wall Street was where it was taken too far – credit default swaps, pools of toxic mortgages, and doubling down on these poor bets. Once one company went out of business their link in the chain quickly broke and all the money became frozen, nobody wanted to lend money to anyone. They didn’t know if they’d ever get their money back.

For 13 months the collapse has been on the verge of turning into one big crater. Day after day, there’s been more bad news in the market, whether real estate specific or financial, all going downhill slowly at first and then starting to pick up speed and falling eventually faster and faster towards a cliff. The 36 hour window of time that put the United States financial market at a precipice in mid-September is chronicled nicely in the NY Times piece here. Firms went bankrupt as credit agencies downgraded their already toxic mortgage backed securities; short sellers gathered hungrily before the short seller ban was instituted; and then panic set in. What’s amazing is that this all started with the American dream.

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