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What is a housing bubble? Causes of the Housing Market Bubble

“Whenever the housing demand rises, the increase in homes prices is characterized as a Housing Bubble

Knowing the factors that cause a housing bubble is essential, but before getting into the details of these, let’s clarify what a housing bubble is!

What is a Housing Bubble?

A real estate bubble, sometimes known as a “housing bubble,” happens when the price of real estate rises rapidly due to increased demand, limited supply, and exuberant spending. When speculators notice that property prices are rising, they enter the market, increasing demand. The phenomenon is known as a bubble because it will eventually burst.

housing bubble

“There were many housing bubbles that occurred in the past but the one that peaked in 2006-2007 is the most notorious. It caused many people to lose their homes”

Major causes of the Housing Market Bubble:

After a brief understanding of the housing bubble, it is important to figure out what caused that surge in demand. There are a lot of different opinions out there, but it’s important to understand the underlying causes of the housing market before making a judgment. Here are some of the major causes of the housing market bubble:

1. Low interest rates – One of the main reasons that people are able to afford to buy homes is because interest rates are relatively low. This means that monthly mortgage payments are affordable for many people.

2. Rising home prices – Another factor contributing to the affordability of homes is that home prices have been rising steadily for many years. This makes it possible for people to get more houses for their money.

3. Easy credit – People can afford homes because credit is readily available. This means that people can finance their purchases with a loan and have a lower monthly payment.

4. Population growth – Another factor that contributes to the demand for housing is population growth. As more people move into an area, there is more demand for housing. This can lead to prices rising even further.

5. Economic growth – Another factor that contributes to the demand for housing is economic growth. When the economy stables, there is more money to spend on things like buying a home.

6. Financial Illiteracy – According to a study in 2018, 53% of adults in America are financially anxious, which means there is visible financial illiteracy in America. Due to this, the majority of people make bad investment decisions leading to housing foreclosures and poor credit.

7. Increase in Population – An increase in population means more supply of housing, which can also lead to inflation. If people speculate on housing prices, that can create a bubble that ultimately bursts.

8. New Mortage Products – When new products are introduced in the market with low mortgage rates, people rush to avail the opportunity as everyone wants to own their house. This can cause an increase in housing demand leading to a housing bubble.

All of these factors have contributed to the housing market bubbles that we have seen in recent years. It’s important to understand these factors so that you can make an informed decision about whether or not you think the market is still a good investment.

How can we burst or end the Housing Bubble?

There are a few ways to do this, but it’s not going to be easy.

The first way is to let the market correct itself. This could mean prices are dropping, which would cause people to stop buying homes.
Another way is for the government to step in and raise interest rates. As a result, it becomes more difficult for people to get mortgages, and causes home prices to drop.
The last way is for the government to build more affordable housing. This would help to ease the pressure on the housing market and would help to bring down prices.

None of these solutions will be easy, but they’re all possible ways to burst or end the housing bubble.

Effects of the Housing Market Bubble on the Economy:

The housing bubble’s widespread impacts on the economy eventually caused a recession. Some of the worst results were:

  • 8.7 million jobs lost
  • 8 million homes lost to foreclosure
  • Loss of equity for 95 million homeowners
  • 500 closings of community banks

Housing Market Prediction. Will it crash or Boom?

It’s tough to say for sure what the housing market’s future holds. Some experts believe that we are headed for a crash, while others believe that the market will continue to boom. No one can know for sure what will happen, but it’s important to stay informed and make the best decisions for your circumstances. By carefully analyzing the current state of the U.S. economy and the interest rates present, you can better understand what might happen.

According to Freddie Mac’s analysis, the housing shortage has expanded by 52 percent, from 2.5 million in 2018 to 3.8 million in 2020. So, It’s impossible to say for sure. However, if you’re thinking about buying or selling a home from any trusted home buyers in New Jersey, it’s important to pay attention to these factors and see how they develop.

The Bottom Line:

It is true housing markets are not as susceptible to bubbles as other markets, but they do exist.

Whatever the causes of the housing bubble, a housing market crash can be disastrous. People can suddenly find themselves owing more on their mortgage than their home is worth, leaving them trapped. This can lead to an increase in foreclosures and homelessness and a decline in property value across the board.

Still, have Questions? Let’s check out the next section.


-What happens when a housing bubble pops?

 The rapid drop in home values, loss in equity, or recession can also occur when the housing bubble pops.

-Will the housing bubble burst in 2024?

No! Interest rates are expected to increase, putting severe pressure on housing affordability in 2024.

-How does housing affect the economy?

Rising housing prices are expected to drive more building spending in order to take advantage of the current low prices, resulting in a more vigorous economic process. A drop in property prices is likely to dampen building spending, resulting in a more sluggish financial system.

-Will house prices drop in 2024? According to a research paper released by Zillow, house prices would likely rise 14.9% between the period of March 2024 to March 2025. That is 2.9 percent down from the last month when home prices would increase 17.8 percent next year.

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