Real Estate Housing Bubble of the United States

In the United States, home prices were at an all time high at the start of 2006, but started to drop off in mid 2006 and into 2007. At the end of 2008, housing industry reports were showing the largest drop in home prices in history, but as of 2010, it is estimated that the prices of homes in certain areas of the U.S. may not yet have reached their lowest point.

Foreclosure rates increased greatly in 2006, bringing about a crisis with homeowners in the United States, causing what the U.S. Secretary of the Treasury called a 'bursting housing bubble', which was potentially a considerable risk to the economy. Collapsing housing markets and credit markets caused concern that an epic recession could hit the U.S., forcing the need of a government bailout for homeowners who could not afford to pay their mortgages.

A housing bubble typically occurs when interest rates are extremely low and banks lessen their lending standards. This leads to frequent buying and selling of properties, called speculative fever where a person essentially buys a home for the sole purpose of selling it immediately for a profit. Speculative fever in the U.S. directly led to the problem of property valuations rising quickly and then the following effect of negative equity. Negative equity occurs when a home's price decreases and homeowners owe more than the value of the property. Low introductory rate mortgages, or sub-prime mortgages that switched over to a regular and higher interest rate also caused the issue of many homeowners being unable to afford their mortgage payments.

One of the most significant side-effects of the housing bubble was the amount of mortgage equity withdrawals that increased considerably from the early 1990s through 2005. It was estimated by the U.S. Federal Reserve that as much as $740 billion USD of home equity was cashed out by homeowners in 2005 for such derelict reasons as to pay off credit card debt and personal spending, as well as for rational purposes such as home improvements.

The 2008 housing bailout cost more than $900 billion USD and more than half of that amount went to the government sponsored agencies of Freddie Mac, Fannie Mae, and the Federal Housing Administration. By the end of 2009, the U.S. government pledged three years of infinite financial support to Fannie Mae and Freddie Mac, even though they had reported losses of more than $400 billion USD. The U.S. Treasury was accused of going beyond their power, effectively acting as Congress when they made these broad decisions.