What was the US housing bubble?

A housing bubble – A real estate or housing bubble means a market condition where the property prices
are hiked by demand and speculation till a time of collapse. Housing bubbles generally initiate with an
increasing demand in the housing sector, in times of limited supply, which takes a longer time period to
replenish and increase. Investors, forecasters pour money into the market, which even derives the
demand higher. And a point comes, where demand stops or decreases and at the same time supply is
increased, which results in a sharp decline in prices—and the bubble bursts.

A housing bubble though seems a temporary happening, but it can last for very long periods of time.
Generally, it’s caused by demand, speculation or high levels of investment injections all of which can
cause real estate market to be unsustainable. Housing bubbles are not only responsible for a major real
estate crash, but also have a major impact on people of all classes and the overall economy. Housing
bubbles have caused many to blow up their life savings.

The United States housing bubble was no different affecting lives of more than half of the people of US.
Real Estate prices inclined 2006, and started to drop in 2007, and reached new lows in 2012. The Case
Shiller housing price index reported its biggest price drop in the history in 2008. The housing bubble is
major cause of the great recession of 2007-9 where people blew up their mortgages in the greed of
getting house loans

The U.S. housing bubble had a direct effect on home valuations, but mortgage markets, home builders,
home supply retail outlets, hedge funds held by large investors, and foreign banks, increases the risk of a
nationwide recession. The situation caused the then President of the US George Bush and the Federal
reserve chairman to announce a bailout of the U.S. housing market for homeowners who were unable
to pay their mortgage debts. The government ended paying over USD 900 Billion in bail outs in 2008
alone.

Design

Hedge funds, insurance agencies and banks caused the subprime mortgages. Hedge funds and banks
created mortgage-backed securities. Insurance agencies backed them by credit default swaps. Demand
for mortgages created an asset bubble in real estate market. 

When the Federal Reserve increased the interest rate for federal fund, it caused adjustable
mortgage interest rates talking to the skies. Resultantly, property prices dropped, and borrowers went
defaulted. Derivatives caused risks for the entire world. It became the reason of the 2007-8 banking
crises and the great recession. It created a horrible situation and probably the worst recession since
the Great Depression.