What Really Caused the Housing Bubble?

The housing bubble involves the economics behind the current state of the real estate market. While there is much debate on what really caused the housing bubble, below is some information relating to the topic.

Financial System

While it had always been safe to assume that real estate values would continue to rise, the infrastructure of the financial system began to deteriorate in ways that only the higher echelons of the financial industry were aware of. In actual fact, many lenders were not aware of what was occurring, until it was too late to correct the situation.

Speculation

A rarely covered aspect of the housing bubble is speculation, which involves borrowing money against the purchase of assets, debt or equity which has not been analyzed thoroughly. This ultimately creates a low safety margin, and therefore, significant risk factors on principal investments.

Since funds are offered solely based upon asset purchases or equity, there is no real guarantee that principals will be paid. As revealed in numerous books on the subject, these actions were occurring at the highest governmental ranks of the financial industry and had very little to do with the actions of lending institutions. Speculation is basically attempting to profit from price fluctuations, irrespective of the item’s true underlying market value, such as:

• Broker trades;
• Buying currencies;
• Holding collectibles;
• Selling bonds;
• Short-selling stocks; or
• Other valuable financial instruments.

Asset Values

There were also many factors which could not be understood well enough in order to make an informed decision, such as:

• Shifting consumer tastes;
• Fluctuation of economic conditions;
• Changing worth perceptions;
• Level of stock security; and
• Market timing factors.

The above factors associated mostly with chart-based analysis, rather than regard many other pertinent influences. This made it impossible for speculators to adequately make investment-quality decisions.

Derivatives Market

The other major culprit in the housing bubble that is nearly never mentioned in mass media markets, is the derivatives debacle. Essentially the derivatives market involves the more precarious aspects of high finance, such as options or contracts, which came from other asset forms.

This volatile market involved exchange trading contracts and over the counter (OTC) products. Clients dabbling in these markets included mostly hedge funds and government sponsored enterprises.

Because these financial markets were largely unregulated and basically left to their own devices, this made it possible for individuals and companies to engage in many unscrupulous financial activities which contributed to the economic crisis, including the housing bubble.

Whatever the reasons you decide to go with for the housing bubble and its collapse, we can all agree that homeownership is for the long haul, and it's a buyer's market right now. If you'd like to learn more about the home buying process check out the "First Time Home Buyers Kit" at the button below. From credit scores to down payments to industry terms defined, this free eBook helps you better understand the home buying process.

(house bubble: Flickr user Nathan Jongewaard)