Real estate bubbles and bursts have happened all over the world with the most prominent happening in Japan in the late 80’s. These bubbles are caused by many factors and builds up over years of wrong economic decisions and policies. Real estate bubbles happen when the cost of the property is speculated to be higher than the real cost. This overestimation of the price of real estate makes the houses bought unaffordable to the people who bought them in the inflated price.
An example closer to home is the San Diego housing market. The price of real estate in San Diego has more than doubled its cost in a span of a decade from 1995 to 2005. This speculated cost that made the prices of real estate more expensive than they actually are is called the bubble. When the real price of estate came up and pushed the real cost of the houses lower than how much the homeowners initially agreed to pay for, many opted to voluntarily default in their payments because they feel that their property is not worth is anymore, while others were forced out of their homes for lack of personal financing.
There are many reasons why this happened compounded over the years. Factors which include sub prime loans, ARM loans, fraud, speculation, mortgage and investment bankers, and monetary policies were executed under bad judgments due to the lack of moral and ethical standards and preemptive regulation from the federal government. With the only principle that these institutions respect being the unregulated gain of profits, coupled with the wave of consumerism that prompted people to live and buy things beyond their means, the bubble was inflated to the point of bursting. The threshold of the bubble was met when the government gave out tax and mortgage interest deductions that prompted people to buy homes and banks to hand cash on a silver platter, giving way to the real estate burst.
This vicious cycle of greed is borne from purchasing more than what people can afford and banks wanting to acquire more wealth no matter what. In this case, monetary and banking policy reforms are not enough. Attitude adjustments from the people from consumerism to becoming more frugal is also necessary.
