Housing Bubble Definition - Investopedia

A housing bubble, or real estate bubble, is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse. AlternativeInvestments RealEstateInvesting WhatIsaHousingBubble? Ahousingbubble,orrealestatebubble,isarun-upinhousingpricesfueledbydemand,speculation,andexuberantspendingtothepointofcollapse.Housingbubblesusuallystartwithanincreaseindemand,inthefaceoflimitedsupply,whichtakesarelativelyextendedperiodtoreplenishandincrease.Speculatorspourmoneyintothemarket,furtherdrivingupdemand.Atsomepoint,demanddecreasesorstagnatesatthesametimesupplyincreases,resultinginasharpdropinprices—andthebubblebursts. KeyTakeaways Ahousingbubbleasustainedbuttemporaryconditionofover-valuedpricesandrampantspeculationinhousingmarkets.TheU.S.experiencedamajorhousingbubbleinthe2000scausedbyinflowsofmoneyintohousingmarkets,looselendingconditions,andgovernmentpolicytopromotehome-ownership.Ahousingbubble,aswithanyotherbubble,isatemporaryeventandhasthepotentialtohappenatanytimemarketconditionsallowit. 1:23 WatchNow:WhatIsaHousingBubble? UnderstandingaHousingBubble Ahousingbubbleisatemporaryevent,butitcanlastforyears.Usually,it’sdrivenbysomethingoutsidethenormsuchasmanipulateddemand,speculation,unusuallyhighlevelsofinvestment,excessliquidity,deregulatedrealestatefinancingmarket,orextremeformsofmortgage-basedderivativeproducts—allofwhichcancausehomepricestobecomeunsustainable.Itleadstoanincreaseindemandversussupply. AccordingtotheInternationalMonetaryFund(IMF),housingbubblesmaybelessfrequentthanequitybubbles,buttheytendtolasttwiceaslong. Housingbubblesdon'tonlycauseamajorrealestatecrash,butalsohaveasignificanteffectonpeopleofallclasses,neighborhoods,andtheoveralleconomy.Theycanforcepeopletolookforwaystopayofftheirmortgagesthroughdifferentprogramsormayhavethemdigintoretirementaccountstoaffordtoliveintheirhomes.Housingbubbleshavebeenoneofthemainreasonswhypeopleenduplosingtheirsavings. WhatCausesaHousingBubble? Traditionally,housingmarketsarenotaspronetobubblesasotherfinancialmarketsduetothelargetransactionandcarryingcostsassociatedwithowningahouse.However,arapidincreaseinthesupplyofcreditleadingtoacombinationofverylow-interest ratesandalooseningofcreditunderwritingstandardscanbringborrowersintothemarketandfueldemand.Ariseininterestratesandatighteningofcreditstandardscanlessendemand,causingthehousingbubbletoburst. Mid-2000U.S.HousingBubble TheinfamousU.S.housingbubbleinthemid-2000swaspartiallytheresultofanotherbubble,thisoneinthetechnologysector.Itwasdirectlyrelatedto,andwhatsomeconsiderthecauseof,thefinancialcrisisof2007-2008.  Duringthedotcombubbleofthelate1990s,manynewtechnologycompanieshadtheircommonstockbiduptoextremelyhighpricesinarelativelyshortperiodoftime.Evencompaniesthatwerelittlemorethanstartupsandhadyettoproduceactualearningswerebiduptolargemarketcapitalizationsbyspeculatorsattemptingtoearnaquickprofit.By2000,theNasdaqpeaked,andasthetechnologybubbleburst,manyoftheseformerlyhigh-flyingstockscamecrashingdowntodrasticallylowerpricelevels. Asinvestorsabandonedthestockmarketinthewakeofthedotcombubbleburstingandsubsequentstockmarketcrash,theymovedtheirmoneyintorealestate.Atthesametime,theU.S.FederalReservecutinterestratesandheldthemdowninordertocombatthemildrecessionthatfollowedthetechnologybust,aswellastoassuageuncertaintyfollowingtheWorldTradeCenterattackofSept.11,2001. Thisfloodofmoneyandcreditmetwithvariousgovernmentpoliciesdesignedtoencouragehomeownershipandahostoffinancialmarketinnovationsthatincreasedtheliquidityofrealestate-relatedassets.Homepricesrose,andmoreandmorepeoplegotintothebusinessofbuyingandsellinghouses. Overthenextsixyears,themaniaoverhomeownershipgrewtoalarminglevelsasinterestratesplummeted,andstrictlendingrequirementswereallbutabandoned.Itisestimatedthat20percentofmortgagesin2005and2006wenttopeoplewhowouldnothavebeenabletoqualifyundernormallendingrequirements.Thesepeopleweredubbedsubprimeborrowers.Over75percentofthesesubprimeloanswereadjustable-ratemortgageswithlowinitialratesand a scheduled resetaftertwotothreeyears.  Muchlikewiththetechbubble,thehousingbubblewascharacterizedbyaninitialincreaseinhousingpricesduetofundamentals,butasthebullmarketinhousingcontinued,manyinvestorsbeganbuyinghomesasspeculativeinvestments. Thegovernment’sencouragementofbroadhomeownershipinducedbankstolowertheirratesandlendingrequirements,whichspurredahome-buyingfrenzythatdrovethemediansalespriceofhomesupby55percentfrom2000to2007.Thehome-buyingfrenzydrewinspeculatorswhobeganflippinghousesfortensofthousandsofdollarsinprofitsinaslittleastwoweeks. Duringthatsameperiod,thestockmarketbegantorebound,andby2006interestratesstartedtotickupward.Adjustable-ratemortgagesbeganresettingathigherratesassignsthattheeconomywasslowingemergedin2007.Withhousingpricesteeteringatloftylevels,theriskpremiumwastoohighforinvestors,whothenstoppedbuyinghouses.Whenitbecameevidenttohomebuyersthathomevaluescouldactuallygodown,housingpricesbegantoplummet,triggeringamassivesell-offinmortgage-backedsecurities.Housingpriceswoulddecline19percentfrom2007to2009,andmassmortgagedefaultswouldleadtomillionsofforeclosuresoverthenextfewyears. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. InternationalMonetaryFund."WorldEconomicOutlookApril2003:GrowthandInstitutions,"Download"ChapterII:WhenBubblesBurst,"Pages68-69.AccessedSept.27,2020. BoardofGovernorsoftheFederalReserveSystem."OpenMarketOperationsArchive."AccessedSept.27,2020. JointCenterforHousingStudiesofHarvardUniversity."TheStateoftheNation'sHousing2008,"Page2.AccessedSept.27,2020. BoardofGovernorsoftheFederalReserveSystem."TheRiseinMortgageDefaults,"Page5.AccessedSept.27,2020. U.S.FinancialCrisisInquiryCommission."FinancialCrisisInquiryReport,"Pages84-92.AccessedSept.27,2020. FREDEconomicData."MedianSalesPriceofHousesSoldfortheUnitedStates."AccessedSept.272020. FreddieMac."30-YearFixed-RateMortgagesSince1971."AccessedSept.27,2020. FederalReserveBankofChicago."HaveBorrowersRecoveredfromForeclosuresduringtheGreatRecession?"AccessedSept.27,2020. RelatedTerms LearnAboutaBubbleinEconomics Abubbleisaneconomiccyclethatischaracterizedbyarapideconomicexpansionfollowedbyacontraction. more Froth Frothreferstomarketconditionsprecedinganactualmarketbubble,whereassetpricesbecomedetachedfromtheirunderlyingintrinsicvalues. more WhatIsaMortgage? Amortgageisaloantypicallyusedtobuyahomeorotherpieceofrealestate,forwhichthatpropertythenservesascollateral. more HOPEforHomeowners HOPEforHomeownerswasafederalprogramaimedathelpinghomeownersinfinancialdistressduetothecollapseofthesubprimemortgagemarketin2008. more WhatIstheFirst-TimeHomebuyerTaxCredit? Thefederalfirst-timehomebuyertaxcreditwasendedin2010butthereareotherstateandfederalprogramsdesignedtoencouragehomeownership. more SubprimeMeltdown Thesubprimemeltdownincludestheeconomicandmarketfalloutfollowingthehousingboomandbustfrom2007to2009. more PartnerLinks RelatedArticles RealEstateInvesting WhyHousingMarketBubblesPop Macroeconomics TheGreatRecession'sImpactontheHousingMarket HomeEquity WhatIstheAverageEquityinU.S.Homes? Markets 5StagesofABubble BehavioralEconomics HowtheFinancialCrisisAffectedMillennials StockMarkets TimelineofUSStockMarketCrashes