A housing bubble, or real estate bubble, is an unsustainable increase in housing prices powered by speculation, heightened demand, and "irrational exuberance."

A housing bubble, like other kinds of economic bubbles, often occurs in the context of predatory lending, poorly thought out mortgages, and lowered interest rates with the Federal Reserve. This very constellation of factors came together to fuel the 2008 Subprime mortgage; subprime mortgages were named such because they were mortgages of lower quality.

What's worse, these subprime mortgages were secured by the big banks leading up to the 2008 housing market collapse. The fact that what otherwise would have been decentralized assets - housing markets are traditionally thought to be region-specific - became interconnected through the security process that created mortgage-backed securities and collateralized debt obligations out of these subprime mortgages. A collateralized debt obligation is technically structured asset-backed security; in the case of the housing market, the asset was the actual home.

The International Monetary Fund has found that housing bubbles may not occur as frequently as traditional equity bubbles, but housing bubbles can take twice as long for effected economies to recover from as equity bubbles.

This means that, although housing bubbles are less frequent, housing bubbles can potentially do more sustained damage to a national economy. As with both equity bubbles and housing bubbles, the unifying feature of all bubbles is the following: A heightened and unsustainable level of trading activity in which the price of the asset class is dramatically higher than the "intrinsic" value of that asset class. You can think of intrinsic value as what the asset class should be worth, or what the asset class (e.g., a home) would be worth in those times when trading was less frenzied.

A bubble will "burst" when investors and the market realizes that the asset is overvalued and people scramble to sell off or "unload" the asset(s) that they purchased. What's seemingly paradoxical is the fact that the asset class often will be at its all-time high in terms of valuation right before the crash. That's exactly what happened prior to the 2008 subprime mortgage meltdown. Housing prices were through the roof before they suddenly collapsed as the mortgage holders and banks holding the mortgage-backed securities realized how overvalued home prices were and how unsatisfactory many of these mortgages were underneath all of the blusters.

The fact that the housing bubble caused such lasting damage to the U.S. economy is in perfect harmony with what economists from the International Monetary Fund predicted: housing bubbles happen less frequently than traditional equity bubbles, yet housing bubbles do more lingering damage to an economy. The Great Recession that followed the housing collapse officially lasted eighteen months, but President Barack Obama dealt with sky-high unemployment through a large swath of his first term.

Fortunately, the rules have since been tightened about who can offer mortgages. Today's home buying is based on a stable foundation - low home financing costs make home ownership especially enticing.

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