What is A Housing Bubble?
A housing bubble is usually characterized by a fast surge of increases in home values until unsustainable levels are reached in relationship to incomes. Then once the peek is reached and affordability is out of reach, this fast surge is directly followed by an equally fast decline in home values - resulting in negative equity for homeowners.
This means that if a person received a bank loan and bought a home during the peak of a bubble, once the bubble bursts, that same home is worth thousands - less or in the case of the California market, hundreds of thousandsless - all within a matter of months or 1-3 years. Also, this resulted in homeowners having a mortgages/bank loasn on homes that were much larger than the home's value.
What About the U.S. Housing Bubble?
The United States housing bubble is an economic bubble that effected many parts of the U.S. housing market. Housing prices started climbing in mid 2004, peaked in early 2006, started declining in 2007 and many experts say, have hit bottom in 2011. On December 30, 2008, I read in the Case-Shiller home price index report - it stated that it had the largest price drop in it's report history in December 2008.
What Caused The Housing Bubble?
The underlying reasons and causes for the housing bubble are complicated. Many blame the interest-only loans, and ARM loans (Adjustable Rate Mortgage) written for home buyers. In my opinion, these types of loans have been a huge factor here in my area - Ventura County (Southern California). I know this because each time I List a home for sale, and it is a "Short Sale," the overwhelming hardship reason stated is, the payment "adjusted" and I just couldn't afford to pay it.
Some Other Causes...
- First, tax policy - for example, the exemption of housing from Capital Gains.
- Next, the historically low Interest Rates during the bubble. This allowed home buyers to qualify for homes that, under historical interest rates, may not have qualified.
- Then, the lackadaisical lending standards (there were "no doc loans" and "100% Financing" loans being made in order to accommodate the mounting pressure to qualify for the upward surge of home prices).
- Next, very importantly, as home prices were driving upward (in 2005 and 2006), homeowners were refinancing and pulling cash equity out of their homes, which some months later proved to be unwise.
- And then finally, the failure of our Regulators to recognize the many warnings, and intervene sooner rather than later!
What happened when the bubble burst?
Increased foreclosure rates in 2006 and 2007 with U.S. Homeowners led us to a real crisis in August of 2008 for the subprime, mortgage, credit, hedge fund, and foreign markets too. In October 2007, our U.S. Secretary of the Treasury stated that the bursting of the housing bubble was "the most significant risk to our economy."
The collapse of our housing bubble had a direct impact on more areas than just home values. The collapse also has impacted our nation's mortgage markets, home builders, and Wall Street hedge funds.
What did the Government do to help compensate for the bubble burst?
Worry about the heavy impact of our housing market collapse, and imploding credit markets in the U.S. economy, led President George W. Bush and the Chairman of the Federal Reserve, Ben Bernake to announce a limited "bailout" of the U.S. housing market. This "bailout" was for our homeowners who were not able to pay their mortgage debts.
In 2008 alone, our U.S. Government allocated over $900 billion to special loans and "rescues" related to our housing bubble bursting. The majority of this money went to agencies of Fannie Mae, Freddie Mac, and the Federal Housing Administration.
What Now... Have We Hit Bottom?
The opinions vary, however it appears that we have. With a total of 3,825,637 foreclosures filed by year end 2010, the purge seems to have taken place. At this point, the cost to rebuild may outweigh the cost to purchase in some areas of California. This supports the "hit bottom" position.
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