Real Estate Chat

How The Housing Bubble Burst March 9, 2010

A lot of people are wondering what can be done to fix the real estate market, but the question that isn’t posed enough is what went wrong in the first place? How did the housing bubble burst? It’s a sensitive topic, but an important one to bring up. If we can understand how and what happened to cause the real estate market to collapse than we may be capable of preventing something like it from ever happening again. There’s not one specific area to point to and say, “That’s what caused the housing bubble to burst”. Rather, there any many different causes that came together to and lead to the crumbling of the housing market and eventually the economy.

One of the first causes was that Americans love to own homes. They love to own homes so much that many analysts of the market have said that around 2005 (the peak of the housing bubble) there was a type of mania and madness going on with people who wanted to buy and own real estate. This started the trend of people buying houses they really loved, but ultimately couldn’t afford. This was the proverbial snowball ready to gain speed down the mountain. If you add this housing madness with the belief that owning rather than renting is a great and smart investment (which some experts say is not necessarily true, but rather is based on a case by case basis), the housing bubble may not have immediately burst but it was being incessantly poked at.

The bubble may have also burst because something imploded right before it. When the stock and the dot-com market crashed in 2000 many took their money away from stocks and used it to buy housing. Some would argue that so much money being taken out of the market and thrown into the supposedly “smart” investment of a house caused a housing frenzy that put people in houses they could never pay for. With so many buying, interest rates and values of homes went down which caused many to hold homeowners accountable for their loans and thus make them pay what they couldn’t afford. Foreclosure rates then increased in 2006 and 2007 and it spelled the beginning of not just troubles for the housing market but for the nationwide economy.

We are now at a point where the market (both housing and economic) is rebounding, but now is more important than ever to remember how we got here. If we do that, we may be able to prevent the housing bubble from ever bursting again.