Definition of a Housing Bubble

• A "housing bubble" is a cyclical economic event where high trade volumes inflate prices, which ultimately become unsustainable, causing a lowering, or "crash" in values. Economic bubbles may be called by a variety of terms, including a speculative bubble, a market bubble or a balloon. Economic cycles of this nature are not exclusive to real estate. They have occurred throughout history in a variety of markets, including stocks, tulips and pottery.
  
  

Contributing Factors to Unstable Housing Conditions

• It could be argued that a housing bubble is really an example of a credit bubble. Although real estate is the underlying commodity, most house buyers use credit -- in the form of a mortgage -- to secure the property. Lax lending guidelines, rapidly inflating values, speculative buyers and the use of adjustable rate mortgages (ARMs), which can adjust to higher rates, are all factors in accelerating the likelihood of borrowers defaulting on their loans.
  
  

The Effect a Housing Bubble Has on Local Markets

• Tighter credit is likely to result after a housing bubble bursts; and although the effects following the downturn may have a broad effect on consumer purchasing power, the depth and duration of the housing bubble effects will vary drastically in local real estate markets. Factors such as location, social trends, local economies and geographic amenities, such as beachfronts and mountains, can play a big role in a local market's resiliency.
  
  

The Broad Effects of a Housing Bubble

• As home values increase and demand for property is high, building is brisk and construction employment is high. Speculators who enter the market early and sell before the market turns can earn good profits. Lenders and real estate brokers are busy, and buyers are motivated to buy. After the bubble bursts, lenders and brokers slow down, construction stops and workers are laid off. Homeowners either can't afford to sell or run the risk of foreclosure.