What were the causes of the housing bubble?
An “asset price bubble” occurs when particular products or assets are bought and sold at inflated values. In the case of an asset bubble like the “housing bubble,” property values were inflated. A rapid rise in demand pushed up prices, and a bubble formed as property values increased faster than income levels and the prices of other goods and services. But the ultimate cause of the housing bubble stems from what drove the increase in demand. The government has made easy lending to low-income homebuyers a policy priority for decades. The Clinton administration, both Bush administrations, Congress, and HUD all pushed government-sponsored mortgage companies Fannie Mae and Freddie Mac to encourage more and more subprime loans to low-income homebuyers (see Q9). In the late 1990s, Fannie and Freddie began to rapidly increase the purchasing of mortgages and securitized mortgages (also known a mortgage-backed securities) from the private sector. The banks recognized that the increased demand w
