The United States housing bubble refers to the economic bubble in real estate in the United States. This follows the stock market bubble in the 1990s which was called, among other things, the dot-com bubble. A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in the valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic indicators. This in turn is followed by decreases that can result in many owners holding negative equity (a mortgage debt higher than the value of the property). Just like any type of economic bubble, it is difficult to identify except in hindsight, after the crash. A May 2006 Fortune magazine report on the US housing bubble states "The great housing bubble has finally started to deflate ? In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials."

There are several factors believed to explain the U.S. housing bubble. The Economist magazine said that "the worldwide rise in house prices is the biggest bubble in history", so any explanation must consider global causes as well as those specific to the United States. Former Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) ? it's hard not to see that there are a lot of local bubbles." President Bush said of the U.S. housing boom in early 2006 "If houses get too expensive, people will stop buying them ? Economies should cycle".

Bubbles may only be positively identified by some in hindsight, after a market correction, and consistent with other economic bubbles, there was debate during about whether unprecedented price increases was caused by sustainable economic reasons such as larger demand due to increased population and liquidity, and limited supply, or by a mania.

Mania for home ownership

Americans' love of their homes is widely known and acknowledged; however, many believe that enthusiasm for home ownership is currently very high even by American standards. Many have commented anecdotally on this phenomenon, as evidenced by the cover of the June 13, 2005 issue of Time Magazine (seen above). This newfound enthusiasm would be consistent explained by other factors and beliefs:

Widespread belief that home prices never fall

This folk wisdom is often heard, and appears to be encouraged by the real estate industry. However, it is manifestly untrue, as evidenced by the relatively recent price history of housing in locations such as New York, Los Angeles, Boston, Japan, Vancouver, Hong Kong, and myriad more.

Widespread belief that housing is a sound investment

For some this has been undoubtedly true, and for others, not. In fact, Robert Shiller shows that over long periods, inflation adjusted U.S. home prices increased 0.4% per year from 1890?2004, and 0.7% per year from 1940?2004. Shiller also showed comparable results for housing prices on a single street in Amsterdam (the site of the fabled tulip mania, and where the housing supply is notably limited) over a 350 year period. Such meager returns are dwarfed by investments in the stock and Bond markets. If historic trends hold, it is reasonable to expect home prices to only slightly beat inflation over the long term. Furthermore, one way to assess the quality of any investment is to compute its price-to-earnings (P/E) ratio, which for houses can be defined as the price of the house divided by the potential annual rental income, minus expenses including maintenance and taxes on the rental income. For many locations, this computation yields a P/E ratio of about 30'40, which is considered high or very high for the stock market. For comparison, just before the dot-com crash the P/E ratio of the S&P 500 was 45.

The "ownership society" versus renting

Though he did not specifically use it in this way, President George W. Bush's 2004 reelection campaign slogan "the ownership society" reflects the strong preference of Americans to own the homes they live in, as opposed to renting them.