In 2006 and 2007, overbuilding had reached the point where home prices began to fall. More and more home owners found themselves owing more money than their homes were worth. As mortgage rates reset, increasing numbers of borrowers defaulted— that is, they could no longer meet their monthly mortgage payments. The value of the new mortgage-based securities fell precipitously. Banks suddenly found themselves with billions of dollars of worthless investments on their books. In 2008, the situation became a full-fledged crisis, as banks stopped making loans, business dried up, and the stock market collapsed. Once above 14,000, the Dow Jones Industrial Average plunged to around 8,000—the worst percentage decline since 1931. Some $7 trillion in shareholder wealth was wiped out. Lehman Brothers, a venerable investment house, recorded a $2.3 billion loss and went out of existence, in history’s biggest bankruptcy. Leading banks seemed to be on the verge of failure.
With the value of their homes and stock market accounts in free fall, Americans cut back on spending, leading to business failures and a rapid rise in unemployment. By the end of 2008, 2.5 million jobs had been lost — the most in any year since the end of World War II. Unemployment was concentrated in manufacturing and construction, sectors dominated by men. As a result, by mid-2009, for the first time in American history, more women than men in the United States held paying jobs.
In the last three months of 2008, and again in the first three of 2009, the gross domestic product of the United States decreased by 6 percent—a remarkably swift contraction. Even worse than the economic meltdown was the meltdown of confidence as millions of Americans lost their jobs and/or their homes and saw their retirement savings and pensions, if invested in the stock market, disappear. In April 2009, the recession that began in December 2007 became the longest since the Great Depression. In an era of globalization, economic crises inevitably spread worldwide. The decline in spending in the United States led to unemployment in China, and plunging car sales led to a sharp decline in oil prices and economic problems in oil-producing countries like Russia, Nigeria, and Saudi Arabia. Housing bubbles collapsed around the world, from Ireland to Dubai.
The mortgage crisis affected minorities the most. Many had been steered by banks into subprime mortgages even when they had the assets and income to qualify for more traditional, lower-cost loans. As a result, foreclosures were highest in minority areas, and the gains blacks, Asians, and Hispanics had made in home ownership between 1995 and 2004 now eroded.