Many experts believe that the global crisis was triggered by the US housing market collapse. There were five key flawed theories of the US Housing Market that caused a tsunami in the financial world. They are:
1) Easy access to credit-Falling interest rates and rising availability of mortgages, combined with rising housing prices encouraged consumers to buy homes.
2) Relaxed lending standards– To cater to the growing number of mortgage seekers, lenders relaxed standards and issued a large number of sub-prime loans
3) Inadequate regulations-Regulations did not keep pace with innovations in US financial products, leading to much higher complexity, poor transparency and greater risk.
4) Complex credit derivatives– The invention and use of complex debt derivatives such as CDOs made it difficult to identify and contain the sub-prime lending problem, once default rates began to rise.
5) Market collapse– The property boom led an over-supply of housing and prices could no longer be supported.Self-perpetuating behavior led to the risk in the US housing market, the crash of it was also self-perpetuating. As prices fell, more foreclosures started taking place, increasing the supply of homes on the market. Lenders started to tighten their standards and fewer consumers could qualify for mortgages and help reduce the supply of home on the market. ( “The Giant Pool of Money” NPR News September 9, 2008)