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Name: Course: Tutor: College: Date: The U.S Housing Bubble Introduction house bubble is a continuous increase in the house prices due to increased demand !or

houses and speculation. The rise in the housing prices leads to speculation that the housing sector is pro!itable. This leads to more investments in the real sector b y individuals who run down their savings and purchase mortgages. Due to increased purchase o! mortgages" the supply o! houses increases more than the demand leading to a stagnated house prices and then a !all a scenario re!erred to as bubble bursting. The bursting o! a bubble has various e!!ects on the economy. #t reduces the household consumption and private investment slowing down the economy. This paper discusses the U.S housing bubble and its e!!ects on the U.S economy. The Housing Bubble in the U.S ccording to $c%innin & Stoec'el ()**+," housing bubble is the run up in the house prices that is !ueled by soaring demand" speculation and the belie! that the latest history is an in!allible !orecast o! the !uture. real estate bubble usually begins with an increase in the

demand (shi!t in demand curve o! real estates, !or real estates while the supply is limited !or a relatively long period. Through speculations" there is a belie! that pro!its can be reali-ed in the real sector in the short.term period by buying and selling the houses (mortgages,. Due to

The U.S housing Bubble speculation and the belie! o! short.term pro!it" demand rises !urther. /owever" at some point"

there is a stagnant or a decrease in the demand that is reali-ed by the le!tward shi!t in the demand curve. The low demand in the real house happens at the time that there is an increase in the supply o! the houses resulting to a drop in the house prices. The decline in the house prices as the supply increase and demand decreases is what $ichael" 0onathan & Damian ()**1, calls the bursting o! a bubble in the real estate. ccording to Sa2ton ()**1," the rise in the housing prices in the U.S since )*** has been described as the biggest housing bubble in history. The boom in the housing mar'et was driven by the low interest rates and a lac' o! perceived returns on stoc' mar'ets that resulted a!ter the bursting o! the stoc' mar'et bubble in )***. Share slump" changing perceptions o! relative returns on assets caused investors to switch holdings o! assets in !avor o! housing. s investors switched pre!erences !rom stoc's to property" rising prices o! houses generated e2pectations o! !urther rises in property values" !uelling additional speculative demands ($c%innin & Stoec'el" )**+,. Sa2ton ()**1, argues that the housing bubble does not burst li'e a stoc' mar'et bubble. t the end o! a boom" the house prices stagnate and then begin to !all. The inventory o! the unsold houses increase leading to a reduction in the house prices. !ter the bursting o! the U.S" housing bubble house prices !ell below )*3. The bursting o! the housing bubble has several economic e!!ects. ccording to $ichael" 0onathan & Damian ()**1," a burst in housing bubble usually results in les activity in the housing sector with more resources being availed !or activity in other sectors o! the economy. The ma4or e!!ect that a!!ects the economy is the e!!ect o! the bursting o! the bubble to the wealth o! the household that a!!ects consumption in turn (Sa2ton" )**1,.

The U.S housing Bubble rise in the house prices leaves homeowners richer with increased consumption. dditionally" more people run down their savings by ta'ing more mortgages and increase their e6uity. /owever" a!ter the bursting o! the bubble" the households reduce their e2penditures due to a !all in their investments in mortgages. #nvestors shi!t their !ocus to others sectors in the economy. There!ore" the bursting o! the bubble a!!ects the real activity in the economy. 7ther e!!ects are a drop in consumer consumption and private investments. Conclusion This paper has reviewed the literature on the housing bubble e2perienced in the U.S. the housing bubble is characteri-ed by an increase in the house prices resulting !rom high demand and low supply and speculation. The high prices lads to more pro!its and more investment in the real sector. as individuals tae up more land to !inance their mortgages" the supply !or houses increases while the demand decrease leading to stagnated or reducing house prices (bubble bursting,. The bursting o! the bubble has bad e!!ects o the economy such as low private investment and household consumption.

The U.S housing Bubble References $c%innin" 9. & Stoec'el" . ()**+,. Bursting o! the U.S Bubble. :conomic Scenarios web. ccessed on November 11" )*1* !rom: http:;;www.economicscenarios.com;public;pd!redir<sample.asp=issueNo>18 $ichael. C." 0onathan" %. & Damian" ?. ()**1,. @Aeal.:state 9oes o! Ban's $ount: Benders Dumping Bad Boans at DiscountC Aegulators See Bosses Continuing"D Wall Street Journal (0une E" )**1," pg. .1. Sa2ton" 0. ()**1,. The U.S. /ousing Bubble and the Flobal Ginancial Crisis: Hulnerabilities o! the lternative Ginancial System. 0oint :conomic Committee. ccessed on November 11" )*1* !rom:

http:;;www.house.gov;4ec;studies;)**1;The<US</ousing<Bubble<0une<)**1<Study.pd!