Explain why house prices fell during the 2008 financial crisis.
Prior to 2008, many banks made loans to people buying houses without properly insuring that they would be able to repay them. The banks assumed that if any given customer had to default on their loan, they would be able to repossess and sell the house to recover the cost. When more people defaulted on loans than the banks expected, many homes were repossessed and put on the market at once. This created a huge positive supply shock to the housing market. Positive shocks in supply, where demand remains relatively stable, cause a fall in price.
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