The Real World of Real Estate
SC: What is a housing bubble?
MZ: A housing bubble is an economic situation that occurs when home prices rise faster than inflation and income. Housing bubbles happen when there's a high demand for homes in a particular area. In a bubble, investors purchase homes in hopes of flipping them for a profit after they appreciate in value.
SC: How does a housing bubble affect homeowners?
MZ: Home prices become so artificially high that peoples' monthly incomes cannot pay for the mortgages on their properties. People keep buying houses, though, because they think the risk of paying a high mortgage will pay off if they can sell at a profit.
SC: How is the situation corrected?
MZ: Housing bubbles are resolved when income levels rise to match the high cost of homes or when home prices fall to match income levels. Usually, home prices fall because income levels are much less volatile than home prices. When people can not afford to pay their mortgages anymore, their homes go into foreclosure and are sold for less than the market price. This, in , causes the prices in the market to decline.
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