Fact Checked

What Is a Housing Bubble?

Ken Black
Ken Black

A housing bubble is a situation where there is an enhanced demand for real estate, especially housing, that is often created through artificial means, such as a lowering of interest rates. The housing bubble can lead to times of economic boom, but can also end in times of economic hardships. The key is to understand what creates a bubble, how best to combat it and how to ease any fallout from it.

One of the main reasons a housing bubble is created is due to a desire by a national bank, such as the Federal Reserve in the United States, to lower interest rates to spur the economy. This creates an interest by some to purchase real estate because it becomes cheaper to acquire that real estate. Therefore, demand goes up. Added to this is the practice of house flipping, in which a home is bought for short-term gain, and the market is further inflated by an artificial demand. As demand increases, prices increase -- substantially more, in some cases, than what may be considered the fair market value.

The U.S. experienced a housing bubble prior to the current recession.
The U.S. experienced a housing bubble prior to the current recession.

A housing bubble can not only create a good economic time for the real estate market, it can carry over into other areas. It can help construction companies, manufacturers of home appliances, electronics and other products, and infuse a substantial amount of money into the overall economy. In this way, it can create a good situation for the economy in a number of different ways, but this is likely to be a short-term situation.

A housing bubble describes an enhanced demand for real estate, most notably housing.
A housing bubble describes an enhanced demand for real estate, most notably housing.

The end of the housing bubble usually happens when interest rates are raised, which must happen if any country is to operate without crippling inflation. Bankers often call very low interest rates "cheap money." Therefore, when that money gets more expensive to borrow, there are fewer demand for homes. Thus, the housing market begins to slow.

Once the housing market begins to slow, there are a number of things that start to happen. The first is that requests for new mortgages begins to drop, followed quickly by housing sales -- both new houses and existing houses. Some new houses, built on speculation during the bubble, will sit vacant. Once those slow down enough, a reduction of price will take place as more sellers hope that a lower price will encourage potential buyers.

Just as there were very good times in the housing bubble, there will be very difficult times when that bubble bursts. However, the end of the bubble will likely see the market put back into equilibrium. Prices will return to fair market value and then begin a more gradual climb upward.

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Discussion Comments


Sunshine31- Robert Shiller, the famous Yale economist that forecasts housing trends in his Case-Shiller report.

According to him, the states housing bubble is far from over. The Robert Shiller housing bubble report states that the month of July saw significant declines in the housing market could be attributed to the expiration of the housing tax credit that expired in June.

Robert Shiller forecasts that many markets have not declined enough and may face a second housing bubble. So the rise in short sales and foreclosures might continue.


SurfNturf-I know what you mean. I tried to buy a vacation home that was a short sale at the time.

The seller had two mortgages on the property on top of another mortgage for a brand new home that he had purchased two years before that.

This property was 100% financed and now worth half of the price he paid for it. The bank wanted $70,000 on top of the asking price, but the asking price was never approved by the bank.

It was just a guess that the realtor had. After several months wasting time on this property, I moved on to a foreclosure that was even better.

With the large number of foreclosures out there, I don’t know why people waste their times on short sales; they only work in a small amount of cases.


BrickBack- Also, if the property has a second mortgage by a different bank then they also have to negotiate with this bank as well.

Even if the bank holding the primary mortgage that is in the first position, the second mortgage holder can require that the homeowners continue to pay the note even after they have moved out because a second mortgage is considered a recourse loan.


Mutsy-I can answer that for you. A short sale is when a homeowner tries to sell a property for less than the loan value.

A short sale has to be approved by a bank. If the homeowner proves to the bank that they can not pay the mortgage and the bank agrees to the short sale then the bank sets the price.

The problem with many short sale transactions is that the realtor sets an artificially low selling price that the bank may not accept.

The realtor may find a buyer for this property, but the approval process can take several months and the bank may reject this offer.

These types of transactions are frustrating for both the buyer and seller because banks take too long to approve.


Bhutan-I was on a housing bubble blog and they were talking about short sales. What are Short sales?


Subway11-They say that one of the main reasons for the housing bubble crash resulted in the defaults of people obtaining these subprime mortgages and defaulting on them.

Many people gambled on the fact that housing prices were rising so rapidly that they felt that they only needed to stay in their homes a short time and quickly sell the property for a substantial profit.

Since these subprime loans were usually interest only loans that had a variable rate, initially the mortgage payments were not too high.

In fact, they were a lot less than a traditional mortgage because no principle was applied. What people did not realize is that these loans would reset at substantially higher rates.

This combined with the fact that many homeowners could not sell their homes caused people to be trapped in their homes. Short sales began to rise as well as foreclosures.


The housing bubble crash is referred to the height of the frenzy real estate market that reached its peak in the mid 2000’s.

Home values were artificially inflated as investors and people that normally did not own property began buying and selling multiple homes for the fast profit.

The prices were built on speculation as property values rising 30% to 40% in six months were not uncommon. Loans were easy to obtain, with a number of lenders allowing no doc or no documentation loans and sub-prime loans.

The no- documentation loans allowed the borrower to state their annual income without showing proof of their salary. The subprime loans were offered to less desirable borrowers who typically could not afford the home with a traditional mortgage.

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    • The U.S. experienced a housing bubble prior to the current recession.
      By: HaywireMedia
      The U.S. experienced a housing bubble prior to the current recession.
    • A housing bubble describes an enhanced demand for real estate, most notably housing.
      By: Stephen VanHorn
      A housing bubble describes an enhanced demand for real estate, most notably housing.