First published at 08:52 UTC on December 3rd, 2020.
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What Is a Housing Bubble?
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. Housing bubbles usually start with an increase in demand, in the face of limited supply, which takes a relatively extended period to replenish and increase. Speculators pour money into the market, further driving up demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices—and the bubble bursts.
Understanding a Housing Bubble
A housing bubble is a temporary event, but it can last for years. Usually, it’s driven by something outside the norm such as demand, speculation, high levels of investment, or excess liquidity—all of which can cause home prices to become unsustainable. It leads to an increase in demand versus supply. According to the International Monetary Fund (IMF), housing bubbles may be less frequent than equity bubbles, but they tend to last twice as long.1
Housing bubbles don't only cause a major real estate crash, but also have a significant effect on people of all classes, neighborhoods, and the overall economy. They can force people to look for ways to pay off their mortgages through different programs or may have them dig into retirement accounts to afford to live in their homes. Housing bubbles have been one of the main reasons why people end up losing their savings.
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