Real Estate - deflation & deleverage

The housing bubble burst.  Combining the falling prices with a credit crisis that choked of liquidity posed the risk of asset price deflation in the real estate market and deleveraging as lenders and borrowers tried to offload toxic assets.  

Banks were selling off debt and hoarding cash wherever possible and in the process they choked off access to consumer financing.  Banks nationwide cut limits on most things including second mortgages, lines of credit, auto loans and credit cards.  Consumers were forced to cut debt wherever possible leading to a significant decline in consumer spending.

The bubble that was real estate could be characterized as asset inflation gone out of control. 

The consequence of deflation can be severe, if prolonged, and includes business failures, high unemployment, the choking off of consumer spending which in turn leads to more business failures and layoffs.

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Headline News was last updated: September 17, 2009

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