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A capital crunch is essentially the same thing as a credit crunch. 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 keep the capital they have instead of loaning it out because they are afraid of not being repaid due to increasing numbers of job losses, mortgage defaults, bankruptcies, and other factors that increase the risk of defaults on loans.

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 of homes concerns builders regarding the building of new homes, and it is likely that they will have to cease such construction. This was evident in areas of the nation where bankruptcies and foreclosures exacerbated an already saturated real estate market.

People who went through foreclosures or bankruptcies or lost jobs then got low credit ratings as a result. The low credit ratings make it almost impossible for those people to get loans, especially loans with reasonable terms. At the same time, because of their fears of defaults on loans, banks tightened their standards for loaning money so fewer people qualified for loans.

That meant that prospective buyers who normally would have gotten loans didn’t get them. As fewer people were able to buy houses, there were even more surplus houses on the market that couldn’t be sold. Before the housing market gets back to normal, the excess of homes has to be sold, but the bad credit ratings and restrictive lending policies, among other factors, are slowing that process.

Yet another negative impact on the real estate market has proven to be the corrections in price, as some regions have seen home prices plummet in the amount of 25% or even higher. There are cases where home values have crashed and burned so badly that numerous individuals then owed more on the mortgage than the house was really worth; this caused a number of persons to choose to abandon payments on their mortgage in order to go through foreclosure instead of staying in this hopeless situation .

For people who want to buy a house, but can’t get the necessary financing, the best advice is to be patient and not give up in despair. If they have a bad credit report for some reason, they should take whatever measures they can to improve their credit rating. As the financial crisis passes and loan restrictions ease, it will become easier to get a mortgage, and the day will come when they can purchase the house that they desire.

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