A credit crunch has additionally been described as a capital crunch. There is usually a shortage in equity capital, and this limits lenders’ abilities to make loans, and this is especially true in regions that have been most affected by the subprime mortgage and financial crisis. In a credit crunch, the lenders quit lending, and instead they hoard their capital, as they are afraid of loaning out too much money with the increasing bankruptcies, job losses, and mortgage defaults, as well as additional factors which boost the risks of an individual not being capable of repaying a loan .
Fewer dollars available for mortgages is the impact that this has on the real estate market. There becomes an oversupply of houses on the market, as fewer dollars are available in mortgages. The excess supply of homes concerns builders regarding the building of new homes, and it is likely that they will have to cease such construction. This was indeed true in parts of the country where the number of houses for sale already exceeded the demand before the flood of bankruptcies and foreclosures intensified the problem.
Job losses, foreclosures and bankruptcies led to people getting negative marks on their credit reports, which led to low credit scores. Low credit scores increase the difficulty of securing credit at all, much less getting good terms on a loan. Besides this, with increasing defaults, bankruptcies, and foreclosures, banks started to tighten up their lending standards to the point that they became far more restrictive than was typical
That meant that prospective buyers who normally would have gotten loans didn’t get them. This only increased the over saturation of houses in the real estate market, since individuals who should have been capable of buying a house were unable to do it. Although the over saturation of houses on the real estate market must be resolved before business can increase again, it is proving to require more time than anticipated, as a result of a number of elements, such as too restrictive mortgage lending practices .
Yet another factor affecting the real estate market is the correction in prices, where some areas have seen reductions of twenty-five percent and up. For some, the value of their home fell so dramatically that they found themselves owing more on the mortgage than the house was worth, which prompted them to quit making their mortgage payments and therefore fall into foreclosure proceedings rather than to remain in such a condition.
Any purchaser having difficulty getting financing is best advised to remain calm and not panic. They should continue doing everything they can to mend their credit, fix their credit reports, and improve their credit scores. As the financial crisis passes and loan restrictions ease, it will become easier to get a mortgage, and the day will come when they can purchase the house that they desire.
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