real estate
Market a real fixer-upper

As more houses went up for sale, prices continued to come down.

"That downturn followed what we knew then, and what we know now, was a totally unsustainable boom period that started in 2002 and ran through 2005," says Dave Seiders, chief economist for the National Association of Home Builders.

When people got to the point that their selling price couldn't cover their mortgage, the first wave of foreclosures hit. The market began to crumble and housing went from leading the nation's economy to dragging it down.

"This was the first time we had this number of foreclosures that weren't connected with a major crisis of the economy," Goodkin says. "This was a housing upturn that started when the economy wasn't rip-roaring, and that ended before the economy went into recession. This was an economic crisis caused by housing, rather than the other way around."

2. Predictions were off 
Even as the housing market disintegrated, major housing analysts across the country spent much of the early months in 2007 predicting better days were in sight, a prediction Simonsen says seemed reasonable at the time.

"At the end of 2006 we actually observed some good strength in the economy. The stock market was up, the economy felt strong. Everyone expected housing would follow," he says.

"Even though there was some risk, the ratings agencies fooled the market and the investors into thinking housing was rock solid," Yun says.

As these so-called subprime loans began to default, deeper fissures in the housing market began appearing.

"That took most of us, and me for sure, by surprise," Yun says. "It was the speed and the scope of the losses that nobody expected. We all saw something coming, but it was bigger and worse than we expected."

With each increasingly bad economic report, it became more and more obvious that a bottom was not coming any time soon.

"We knew it would be a rough year," Porter says. "But, while I think that there was this idea that we were going to see the bottom toward the end of the year, the subprime situation really prolonged everything and pushed the recovery into the future."

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Following a record wave of foreclosures, few lenders are in a hurry to return to loose underwriting standards, and many are reacting by adopting tighter-than-normal lending standards.

"The lenders got their teeth knocked in, and now they are ultraconservative," Goodkin says. "That compounds the problem because now there are more foreclosures and people can't sell if they are in financial problems, and you see people walk away from homes, which is a bad situation all around."

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