The Joint Center for Housing Studies of Harvard University recently released its "State of the Nation's Housing" report for 2008.  This report offers valuable insight into the complex and challenging nature of the current real estate market.

Included in this report is an overview of the "mortgage meltdown" -- its origins and impact on the nation's economy.  It's one of the best pieces I've read on the subject.  Here are some highlights:

-  Subprime mortgages rose from only 8% of originations in 2003 to 20% in 2005 and 2006.

-  Interest only and payment-option loans increased from just 2% in 2003 to 20% in 2005.

-  Multiple risks were often "layered" onto individual loans.  For example, many subprime mortgages also had discounted initial rates that reset after two years, leaving borrowers vulnerable to "payment shock".

- Lenders eased underwriting standards, offering loans that required little or no downpayment or income documentation.  This meant that many loans were underwritten without a clear measure of the borrowers' ability to repay and without equity cushions as protection against defaults.

-  Housing speculators were also readily able to get loans to buy investment properties, relying on soaring home prices to "flip" and resell at a profit.

The report continues, explaining the "snowball" effect on the nation's economy: "The layering of mortgage lending risks at the peak of the market had serious and far-reaching consequences.  As the economy weakened and mortgage interest rates rose, the number of homeowners unable to keep current on their payments began to climb.  With prices falling, many owners could not sell their homes to avoid foreclosure.  Meanwhile, many housing speculators defaulted even before their interest rates reset.... As a result, serious delinquencies soared in late 2006 and throughout 2007.  The swift deterioration, especially in subprime loan performance, caught many mortgage investors unaware.  Demand for securities backed by subprime mortgages dried up so fast and so completely that investors were forced to sell them at a loss.  Compounding theses problems, several investment funds and mortgage companies had to borrow to purchase the securities with debt they had to roll over.  When lenders were unwilling to provide more money as the debts came due, some companies were forced to default and lenders had to take many assets back on their books.  The sheer size of mortgage debt outstanding and the fear that the crisis would soon spread to consumer credit led to a freeze in credit markets and run on investment banks and funds."

The report and executive summary are available to the public on-line at no charge:

For the full report copy and paste this link into your browser: http://www.jchs.harvard.edu/publications/markets/son2008/son2008.pdf

For the executive summary copy and paste this link into your browser: http://www.jchs.harvard.edu/publications/markets/son2008/son2008_executive_summary.pdf