The crisis can be attributed to a number of factors pervasive in both housing and credit markets, factors which emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments, due primarily to adjustable rate mortgages resetting, borrowers overextending, predatory lending, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, monetary policy, international trade imbalances, and government regulation (or the lack thereof). Two important catalysts of the subprime crisis were the influx of moneys from the private sector and banks entering into the mortgage bond market and the predatory lending practices of mortgage brokers, specifically the adjustable rate mortgage, 2-28 loan. Ultimately, though, specific to the bailout of Wall Street and the financial industry moral hazard lay at the core of many of the causes.
In its “Declaration of the Summit on Financial Markets and the World Economy,” dated 15 November 2008, leaders of the Group of 20 cited the following causes: During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
Boom and bust in the housing market
Main articles: United States housing bubble and United States housing market correction Existing homes sales, inventory, and months supply, by quarter.
Vicious Cycles in the Housing & Financial Markets Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption. The USA home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004. Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher.