Housing Bubble
A housing bubble is a temporary state of crisis in housing markets that is typically described by a significant difference of demand and supply, as well as severe fluctuations of prices. This bubble is otherwise known as a housing price bubble, or real estate bubble. These market bubbles often take their roots from a speculative acceleration of demand, and consequently prices, while the actual supply might be insufficient. Then, when supply reaches the level of demand, the latter drops, leaving housing markets full of overpriced offers.
As any other market bubbles, the housing bubble is a transitory phenomenon, which lasts for a certain period of time, and eventually comes to an end. It might occur again at any moment, when factors favorable for its development will be present again. Although they are hardly predictable, it’s possible to foresee such unfortunate economic situations.
One of the most well-known and dramatic housing bubbles has happened at the beginning of the 21st century in the US. It was caused by several reasons:
- huge inflows of money in housing markets;
- low control over the process of issuing loans;
- government support for homeownership.
Also, along with other factors, it led to an infamous global financial crisis of 2007-2008.
Housing Bubble significance
Despite the housing bubble’s temporariness, it might last for a few months or even years. Its influence is, without understatement, highly significant. Mostly for the reasons of operating with a great amount of people and money involved. Consequently, a burst of a bubble this size causes a lot of damage to many people and to a country’s economy as well.
In these economic situations, people try to pay off their mortgage debts by dipping into their savings, investments, and other types of financial safety net, thereby causing meaningful outflows of money from some sectors of the economy.
However, housing bubbles are quite rare in comparison to other bubbles like equity bubble or debt bubble.
Reasons for the Housing Bubble formation
Such phenomena as housing bubbles are typically caused by an abnormal market behavior:
- speculations;
- sharp and substantial changes of demand or supply, interest rates, prices;
- huge and unexpected inflows or outflows of money;
- etc.
All of these characteristics might be the indicators of a bursting bubble, which can also be described as the market reaction to some extraordinary financial events or speculative actions.
Real example of the Housing Bubble
Let’s take attention to the aforementioned US housing bubble of 2000th. This bubble was caused by another one, a dotcom bubble, which had happened shortly before that time. Therefore, it was like a chain reaction. Also, these bubbles were alike because both of them started with a significant rise in prices and continued with a growth of speculative businesses aimed at getting advantage of the situation.
The dotcom bubble started to form by the end of 1990th and burst in 2000. In hopes of saving their investments, people focused on real estate. Housing markets experienced a great inflow of investments, and that was one of the reasons for the bubble’s formation. Along with this money inflow, mortgage interest rates got lower in order to calm down the market after the dotcom bubble’s stress, as well as to calm down the country after the dramatic events of September 2001. These factors altogether put the market economy at risk. Demand started to grow, spurring housing prices, and after a few years these metrics reached dangerous levels.
In 2005-2006, about 20% of mortgages were given to borrowers who weren’t able to pay the debt back. Also, there were a great amount of adjustable-rate mortgages (ARM) with low fixed interest rates for initial payments. As a result, the US credit system failed itself in that period of time. Since 2000 to 2007 the prices rose up by more than 50% due to the speculative actions of some market participants, as well as the government’s encouragement to purchase property. When the government started to raise interest rates, housing prices dropped, leaving a lot of people with debts and overpriced properties. After the financial crisis of 2007-2008, which followed the housing bubble, many people suffered severe financial consequences.
