What is the housing bubble and why did it burst?

Question

What is the housing bubble and why did it burst?

Answer 1

The housing bubble was a period from the turn of the century to 2007 where real estate values increased dramatically in many parts of the country. People saw this as an investment opportunity and speculated in real estate, driving these prices up further. Real estate is traditionally an asset that only goes up in value (but that's not a law of natue as we know now) and people thought these prices could continue to increase.

The bubble was not sustaining as real estate got too expensive for most people to afford and there became a glut of property on the market which caused prices to fall (the bubble burst). People could not afford to pay their mortgages and had their homes foreclosed upon.

Banks are losing billions in revenues from these defaulted loans and the economy is suffering from a lack of loanable funds.

Answer 2

The bubble was artificial inflation of value because of greedy people buying homes they could not afford.

The burst happened when the same greedy people started refusing to repay the money they borrowed to buy the houses.

After all of the greedy people have been foreclosed on the market should settle down.     We have about another year to go, Bush changed the laws a year or so ago so that people could not be so dishonest in borrowing, but the benefit of that has not caught up to us yet.

Answer 3

A "bubble" in any type of investment (real estate, stocks, commodities, etc.) is where speculation about the increase in value artificially increases the value. For example, look what happened to the housing market.

After 9/11, the housing and stock markets went into a steep dive as people felt the panic of the attacks. In response, the Federal Reserve reduced interest rates to make it more attractive for businesses to borrow the money they needed to keep the economy going. And, eventually, this filtered down to the home mortgage market.

As mortgage interest rates fell, home prices increased. This is because of the way the mortgage system is set up. Unless they pay cash, people don't buy property based on the list price of a home; they buy property based on how much it costs per month. So, when interest rates plunged, housing prices increased at about the same rate.

Then came the speculators, who figured that buying a house today might turn them a profit by selling it a year later. Or, they would buy a run-down fixer, patch it up, and resell immediately (this is called house flipping). As more and more people made serious profits by flipping houses, the demand for houses increased even further, which caused even greater price increases.

At that point, the housing market was said to be on a bubble, not on a sound financial foundation. And, all it would take is for some event to come along to pop that bubble, sending the housing market plunging into the ground.

The event that caused this housing bubble to pop was the mortgage crisis. Housing prices were so high and people were so desperate to get a piece of the pie that they took out loans they couldn't afford. Usually, this was in the form of an adjustable rate mortgage (ARM) with a very low two- or three-year teaser rate (like 3 or 4 percent) that would adjust up to market rates (6 to 7 percent or more) at the end of the teaser period. And, people figured that prices would have come up enough by then for them to sell for a profit before they had to pay the higher rate.

Unfortunately, another mechanism was at work: new housing was being built and housing inventories grew faster than demand. Housing developers couldn't sell their units and began reducing prices. This caused all housing price increases to screech to a halt and begin to reverse.

Then came the foreclosures. As more and more ARMs began to adjust upward, some people's monthly payments doubled or even tripled to where they simply couldn't afford the payments. So, they stopped paying and the bank took their property away. The banks aren't in the business of owning property and want them off the books fast. So, they reduce the price for a fast sale, which drives down the prices of all property in the area. This is what caused the real estate price free-fall that we're currently experiencing.

Once the flood of foreclosures subsides and housing inventories come back down to reasonable levels, we're going to see prices come back up again. Slowly at first, and maybe with a bit of a hiccup after the first year or so. But, expect to see real estate make a rebound and be back to peak levels of 2005 and more in the next 7 to 10 years. You know, another bubble.