How the housing market can just “crash”? I (think I) get how the prices can go up, but what makes them go down suddenly?
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It’s important to understand that the prices in a market are largely dependent on the **perception** of value. When discussing economics, people generally assumed to be rational actors who have access to perfect information, but in reality that is never the case. This is also complicated by the term “housing market” referring to two distinct but interconnected things: the market of actual homes being sold or rented, and the market for housing bonds.
A housing bond is a financial instrument in which a bank agrees to give the owner of said bond a portion of the profit they make from a set of thousands of housing loans. While it’s obvious how the actual market influences the housing bond market, it’s not immediate obvious how the reverse happens. Because the banks are both issuing the loans and sell the bonds, this creates a perverse incentive to issue more of the kinds of loans that make the banks more money when they sell it as a bond. This problem spreads throughout the actual housing market, as bank issues more loans to developers to create the kind of housing that makes them the most money in bonds, regardless of the demand in the actual market. These homes to sold to speculators who expect to be resell the house at a later date, but are ultimately unable to because the house that was built meets the bank’s demand instead of people who actually want a home.
Because the speculators bought when the perceived value was high, they need to sell it at a high price in order to make their money back. However, as some point, they realize that they can’t, and the price will drop to what the market is actually able to afford.
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