Housing bubble refers to the rapid increase in the prices of houses; this increase in prices is derived by demand and by speculation and the confidence level in the real estate market that there would be profits and benefits in buying and selling of houses.
The 2000-2006 bubble scenario
The United States witnessed a huge hike in housing prices; the prices of houses in real estate increased from 60 to 90 percent during 2000-2006. This increase in housing prices was due to two major reasons. They are as follows:
• Increase in income
• Low mortgage interest
Increase in income increased the propensity to consume and the disposal of income; lower interest rate on mortgage loans allowed more people to buy houses.
The decrease in the value of asset reduces the value of holdings of the people, so people consume less. This reduction in consumption decreases the demand, which in turn leads to a decrease in output, employment, and income. Consequently, this results in recession.
It is the amount of debt or obligation incurred by the bank.
Checkable deposits are liabilities to the banks
Banks create money through demand deposits and lending funds where the interest is collected for the principal amount lent by the bank.
These demand deposits are considered as a liability by the bank because they have to be repaid to the customers on their demand at any time.