How can a decline in real estate prices cause deleveraging and a decline in lending?

Real Estate as Collateral: Real estate is often used as collateral for loans. When real estate prices are high, borrowers can use their property as collateral to borrow more money.

Decline in Real Estate Prices: When real estate prices decline, the value of the collateral (the property) also decreases. This means that the amount of money that can be borrowed against that property also decreases.

Deleveraging: Deleveraging is the process of reducing the level of one's debt by rapidly selling assets. When real estate prices fall, borrowers may find themselves in a situation where the value of their property (their asset) is less than the amount they owe on their loan (their debt). This is known as being "underwater". In such cases, borrowers may be forced to sell their property at a loss to repay their debt, leading to deleveraging.

Decline in Lending: As the value of real estate (used as collateral) decreases, lenders may become more cautious and reduce the amount of money they are willing to lend. This is because the potential loss they face if a borrower defaults (fails to repay their loan) is now higher. This can lead to a decline in lending.

Negative Spiral: The decline in lending can further depress real estate prices, as fewer people are able to secure loans to buy property. This can create a negative spiral of falling real estate prices and reduced lending.