Understanding Housing Bubbles: Causes, Risks & How to Spot One

The term "housing bubble" is used to describe a period in which the housing market is expanding. The housing market tends to be cyclical. This means that it will go through periods where the demand for houses is much less than the current supply. When this happens, many investors will try to purchase properties and make money off of the short-term appreciation in value. 

In the short-term, the investors can make substantial profits. However, if they do not time the investment properly, it can hurt them financially. When the housing bubble bursts, the supply of houses catches up to the demand. When the supply exceeds the demand, the value of all real estate starts to go down.

At this point, the housing bubble can affect many different industries and the economy as a whole. As a general rule, the housing market is not as susceptible to bubbles as other financial markets. This market tends to move quite a bit more slowly than the stock market, the commodities market, the forex market or other markets. In order to invest in the real estate market, investors have to have substantial assets. Therefore, the real estate bubble does not burst that frequently, but when it does, it can cause some damage.