A proper definition of the term credit crunch is needed so that its effects on the real estate market can be properly analyzed.
According to several Internet and book sources, credit crunch is a period when borrowers have a hard time obtaining financing.
Even when they are able to find financing, the interest rates will usually be very high.
A capital crunch is what a credit crunch has also been defined as.
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.
During a credit crunch, lenders stop lending, and they hold on to their capital because they fear lending money because there are rising bankruptcies, mortgage defaults and job losses, and other factors that increase the risk of a person not being able to repay a loan.
The effect on the real estate market is that there is less money available for mortgages.
Since there is less money available for mortgages, there is an excess supply of homes.
The excess supply makes builders more wary about building new homes, and they may even stop building altogether.
This was seen in some areas of the country where bankruptcies and foreclosures added to an already glutted real estate market.
Job losses, foreclosures and bankruptcies led to people getting negative marks on their credit reports, which led to low credit scores.
Low credit scores make it much more difficult to obtain credit and to get good terms on loans.
In addition, with rising bankruptcies, defaults and foreclosures, banks tightened their lending standards until they became much more restrictive than they should have been.
People who should otherwise have gotten approved for mortgage loans were turned away.
This added to the oversupply of homes in the real estate market as people who would have otherwise been able to buy a house could not do so.
The oversupply of homes in the real estate market has to work itself out in order for things to pick back up, but it is taking longer to do so because of several factors, including overly restrictive mortgage lending policies.
Another effect on the real estate market has been the price correction, with areas seeing drops in prices of 25% or even more.
In some instances, home values dropped so drastically that people ended up owing more on the mortgage than what the house was worth, this led to some people deciding to stop paying their mortgage and undergoing foreclosure rather than being in this situation.
The real estate market is slowly rebounding, but it will take time for housing stocks to come down.
Lenders are already easing restrictions, but it is not expected that they will be as permissive as they were before the financial crisis.
For buyers who are having trouble obtaining financing, the best thing to do is not to panic.
They should continue doing everything they can to mend their credit, fix their credit reports, and improve their credit scores.
As restrictions ease, they will find it easier to qualify for a mortgage loan, and they will eventually get into the house that they want.