A rapid reversal of U.S. house prices set off a chain of events that eventually led to the global financial crisis.
Housing boom Between 2000 and 2006, U.S. house prices rose dramatically, fueling a home construction boom.
Easy credit Lenders made home loans on ever-easier terms, even to risky borrowers, knowing they could sell those loans to investors. For their part, investors underestimated the riskiness of the loans.
Housing bust and mortgage meltdown As house prices started to fall, the housing boom quickly turned into a bust, bringing home construction to a halt and creating a vicious cycle that fed higher and higher levels of mortgage delinquencies.
Banks and other financial institutions faced enormous losses on mortgages and related investments, leading to a worldwide pullback in credit to households and businesses.
Mortgage-related losses skyrocketed The mortgage meltdown drove down the value of residential mortgage-related loans and investments held by banks and other financial institutions in the United States and abroad.
Confidence erodes As losses spread worldwide, financial institutions started to worry about the viability of other financial firms, which made them hesitant to provide the short-term funding those firms needed to operate.
Financial markets panic Following the failure of investment banking giant Lehman Brothers, markets for short-term funding broke down altogether, igniting global financial panic.
According to one measure, U.S. house prices rose about 10 percent per year on average from 2000 to 2006, well outpacing gains in income.
Early this decade, securitization of riskier mortgages expanded rapidly, including subprime mortgages made to borrowers with poor credit records.
Starting with subprime mortgages, more and more homeowners fell behind on their payments. Eventually, this spread to prime mortgages as well.
In October 2007, shortly after the onset of the housing bust, the International Monetary Fund (IMF) estimated that losses of financial institutions related to U.S. residential mortgages would total $240 billion. By April 2009, their estimate was nearly six times larger, exceeding $1.4 trillion.
Fears about the financial health of other firms led to massive disruptions in the wholesale bank lending market and rates on short-term loans rose.
In the fall of 2008, two large financial institutions failed: the investment bank Lehman Brothers and the savings and loan Washington Mutual. Several others threatened to go under. Confidence in the financial sector collapsed and stock prices plummeted.
Banks and investors clamped down on many types of loans by tightening standards and demanding higher interest rates - a classic credit crunch.
Plummeting house prices reduced the wealth of Americans by over $6 trillion. In addition, nearly one half of stock market wealth was lost during the worst stage of the crisis.
The recession had been relatively mild until the fall of 2008 when financial panic intensified, causing job losses to soar.