Something I posted on another forum, thought I may as well put it in here as well...
A more detailed explanation as to why banks won't be as willing to lend large amounts in future.
In the old days (well anything more than a decade ago really) banks loaned out money and took money in as savings.
These days it has become a lot more complicated than that.
Effectively a mortgage is a bond, it's a commitment to pay a fixed amount for a fixed time period.
As such it has a value and can be sold on, in much the same way that a standard bond can be.
A mortgage on the average family house generally wouldn't be of interest to a large bank or hedge fund so you end up with lots of mortgages being packaged together in something called a CDO.
http://en.wikipedia.org/wiki/Collateralized_debt_obligation
These are split up into things called tranches and given ratings.
Like a normal bond the ratings depend on the risk of default.
Now there were some problems with the rating given as has been found out recently.
Things that were rated AAA were treated in the same respect as a normal AAA rated bond, something which would generally only be given to a government bond of a 1st world country.
So, CDOs were trading at values far higher than they should have been given the risk - this meant that banks could afford to liberally award mortgages to people because they could then sell the debt on for a good price.
You can see how the price of a AAA rated CDO changed here:
http://www.markit.com/information/products/abx.html
Take a look at any of the AAA tranches and see how they've fallen in price recently (in fact take a look at any of them to see the same!)
Obviously this then means that the banks can't make as much money by selling on their mortgages anymore.
Thus, they will either have to up the rates or be a lot more stringent with their lending and only lend to people with a) large deposits or b) excellent credit or possibly only c) people with both of these things.
It seems that the rating systems used only took into account rising house prices (after all, who cares if people default on their loans if you can reposess a house that's worth substantially more than the value of the loan)
http://globaleconomicanalysis.blogspot.com/2007/07/fitch-discloses-its-fatally-flawed.html
Once prices stopped rising in the USA it was only a matter of time before it all fell apart.
British banks are affected by all of this as well, it's certainly not something that is limited to the USA.
At the moment the main consequence of all this is the fact that banks are unwilling to lend to each other.
The LIBOR (
http://en.wikipedia.org/wiki/LIBOR) is currently at 6.70% for a 1 month loan, even though the BoE base rate has been reduced to 5.5%
This means that banks are finding it expensive (and for some very difficult, hence Northern Rock) to source money and this is adding to the issues of being able to give out cheap mortgages.
Hopefully that explains things a bit better.
IMO the next couple of years will see house prices fall.
Market value is only what someone is willing and able to pay, if the ability to pay drops then so will the market value of houses.
Another part of the problem is the 'housing boom' has made people greedy. I'm not in the business but my family are, and they are always telling me stories of how they go to value a house, say it's worth x pounds, then the owners say something like "ooh we thought it might have been worth x + 1 bazillion". They have no reason for this, maybe they painted a room, but it's fickle people like that who make things seem worse than they are.