A capital crunch is what a credit crunch has also been defined as. In a capital crunch, there is a shortage of capital available for investment, which limits the amount of money that can be loaned for new enterprises; this has especially been true in areas that were the hardest hit by the recent financial downturn. In a credit crunch, lenders are hesitant to lend, holding onto their capital since the increasing incidence of bankruptcy, mortgage default and rising unemployment makes them fearful of the greater risk of payment default.
As it applies to the real estate market, the effect is a lack of money to fund mortgage loans. With the lack of money to fund mortgages, an excess supply of homes for sale develops. 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. Lower credit scores cause it to become more challenging to get credit and loans on affordable terms. Besides this, with increasing defaults, bankruptcies, and foreclosures, banks started to tighten up their lending standards to the point that they became far more restrictive than was typical
That meant that prospective buyers who normally would have gotten loans didn't get them. 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 excessive number of houses for sale must be resolved for the market to rejuvenate, but several factors, not the least of which is inordinately restrictive mortgage lending policy, are creating a drag on the recovery. .
The drop in value of homes, in some areas of 25% or more, also has affected the housing market. Because of the drastic drop in home value, some people owed more on their existing mortgage than they could get if the house was sold; this led to some homeowners deciding to go through foreclosure rather than continuing to pay on their mortgage.
For buyers who are having trouble obtaining financing, the best thing to do is not to panic. They need to keep doing whatever they can to repair their credit and increase their credit rating. As restrictive lending policies loosen, mortgage loans will become more available and they will be able to eventually purchase the house they desire.
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