Understanding the real estate bubble: Definition, causes and examples

What is a housing bubble? A housing or real estate bubble is a rise in housing prices that is driven by demand, speculation and extravagant spending. It can lead to market disruption. Housing bubbles usually start with an increase in demand with limited supply. Their recovery and increase usually takes quite a long time. Speculators further increase demand by injecting money into the market. Demand declines or stagnates at some point as supply increases, causing prices to plummet. The bubble then bursts.

Main conclusions

A housing bubble is a long-lasting but temporary state of overvalued prices and widespread speculation in the housing market. In the United States in the 2000s''limited supply. Housing bubbles don't just cause major crises in the real estate market. They also have a significant impact on people of all classes, neighborhoods, and the overall economy. They can cause people to look for ways to pay off their mortgages through various programs or spend money from retirement accounts to continue living in their homes. Housing bubbles are mainly the reason why people lose their savings. Housing bubbles may be less frequent than stock bubbles, but they tend to last longer - according to the International Monetary Fund (IMF).

What causes a housing bubble?

In contrast to other financial markets, housing markets are traditionally not prone to bubbles because of high transaction and servicing costs,''related to home ownership. However, rapid growth in the supply of credit at low interest rates and loosening credit standards could attract borrowers to the market and stimulate demand. Rising interest rates and tighter credit standards could reduce demand, causing the housing bubble to burst.

The U.S. housing bubble in the mid-2000s

The obscure housing bubble in the US in the mid-2000s was partly the result of another bubble in the technology sector. It was directly related to the financial crisis of 2007-2008, and is considered by some to be the cause of that crisis. Many new technology companies raised the market prices of their shares to extremely high levels in a short period of time during the internet company bubble''technology, and to mitigate the uncertainty caused by the attack on the World Trade Center on September 11, 2001. This flood of money and credit was associated with various government policies to encourage home ownership and many innovations in the financial markets that increased the liquidity of real estate-related assets. Home prices rose and more people became involved in the business of buying and selling homes. The home ownership mania reached alarming levels as interest rates fell over the next six years. Strict lending requirements were essentially abandoned. It is estimated that about 20 percent of mortgages in 2005 and 2006 were granted to people who would not have qualified under conventional''lending requirements. These people were referred to as post-subprime borrowers.

What''is a speculator in the real estate market?

A speculator buys real estate because he or she has reason to believe that the market or some factor in the economy will lead to an increase in value, sometimes in the short term. The goal is to "flip" the property and sell it as soon as that happens, making a profit. Unlike a speculator, an investor expects to realize a longer-term profit as a result of factors unrelated to or in addition to market volatility.

What are adaptive mortgages?

The interest rate on adaptive mortgages (ARMs) can change over time, and this will affect a homebuyer's mortgage payment, causing it to increase or decrease periodically.''Most ARMs have interest rate caps and floors and other controls to prevent frequent, sharp and painful rate fluctuations. The advantage of this type of mortgage loan is that the interest rate is usually lower than fixed-rate mortgages in the initial years of the loan.

What is the mortgage execution process?

The mortgage enforcement process can vary slightly from state to state, such as restrictions on when a mortgage lender can start the process. It is usually initiated because the homeowner has stopped paying on the mortgage loan. A mortgage contract gives the lender a secured interest in the property, which gives the lender the right to legally seize''property by providing appropriate notice to the homeowner and giving the homeowner an opportunity to cure the loan violation. The lender then sells the property to repay some or all of the money it loaned so that the original owner can buy the property.

Main conclusion

A housing bubble can significantly reduce your equity in your home, and this is usually due to some economic factor that is beyond your control. Suddenly, you may find that your mortgage balance is significantly higher than the value of your property. If you can keep paying your mortgage and don't plan to move in the near future, you have time to weather the bubble.''But if this is not your case, you may need the help of a real estate professional or lawyer. Be extremely cautious if you are thinking of investing in real estate during a period when home values are low, believing that you will be able to sell them for significantly more in the future. Housing bubbles can have lasting and dramatic consequences.