Mortgages are a type of collaterized loan, meaning that it has something in the form of collateral that can be seized if the borrower defaults on the loan. In this case the collateral is the home itself. Though mortgages date back over centuries, these days they are viewed as an indication that someone has reached a certain level of wealth. A home is the largest purchase most people will ever make in their life and is viewed as their greatest asset. Sometimes such an attitude leads to problems when people expect their homes to rise in value too quickly. We saw this with the housing crisis that began in late 2007 and continues today.

Obviously the value of a home cannot continue to rise without end, independent of other economic factors. It eventually must flatten out. If it goes too long without flattening, we get what we have down, a dramatic and drastic correction in the value of homes. Across the country, homes have on average lost 27% of their value and in certain markets they are currently worth about a quarter of what they were before the crash. The result is that people who purchased their homes during the height of the bubble are in over their heads. Their homes are suddenly worth much less than what they owe. Many people decide the best thing to do is to walk away from the home and the mortgage and allow foreclosure to happen. This leads to a further drop in home value as more of them sit empty, which in turn leads to more people underwater. It's a vicious cycle.

If you are someone in the market for a home, this is the time to do it. Banks, desperate to unload some of their foreclosed homes, are willing to offer great deals on the homes as well as the mortgage. But at the same time they are spooked by the possibility of losing more money and are much pickier in deciding to whom they will loan money. As the crisis continues, we can expect to see interest rates remain low as lenders try to recoup their losses.