Causes And Consequences Of The Housing Bubble

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A combination of factors in the early 2000 's caused the perfect economic storm to trigger the worst recession the United States had experienced since the Great Depression of the 1930 's. The "housing bubble" and subsequent burst left homeowners owing more on their mortgages than the property was worth and fueled the financial crisis of 2007-2009. Many economists label the housing bubble as the single largest contributing factor to the financial crisis. Caused by low-interest rates, relaxed standards on lending and the misguided belief that prices and the value of homes would continue to rise, the US economy is still recovering from the effects of the housing bubble. To understand the causes and consequences of the housing bubble, we must first define it. In general terms, an economic bubble is "characterized by a surging increase in asset prices to levels significantly above the fundamental value of that asset" (Campbell, 2011). The housing bubble was characterized by steeply rising home prices, with no corresponding rise in home rentals as shown in Figure 1. Case & Shiller examine the origin of the term "housing bubble" stating that the term appeared a few times in 1987 after the stock market crash. The term was not seen again in any frequency until 2002, when the press popularized the term. The paper also links housing bubble to the more widely used term "housing boom" which was described as being "much more neutral than ‘bubble ' and suggests that the rise in prices may
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