What's This about a Housing Bubble?

In his recent testimony, Alan Greenspan warned against the possiblity that we have seen home prices plateau. The bursting of the "bubble" could cause a big hit to the U.S. economy. But, why should we worry?

Well, as we all know, house prices are up across the country...over 10% in the last year, including over 25% in some markets. Additionally, house prices have risen over 70% since 1994, more than double the increase of renting during that time period. Demand for houses is high, as interest rates have stayed low. This has created an investment market for houses.

Now, the average homeowner can use the equity in his/her home to finance the purchase of one or more additional houses. One statistic showed that 13% of houses are currently unoccupied, due to investors gobbling them up, hoping the prices will continue to skyrocket.

But can these prices last? Once the supply of houses exceeds demand, we could see a rapid drop in prices, as people look to sell their extra homes. Higher interest rates or falling prices could scare away potential buyers, creating a housing market crash.

Furthermore, those with Adjustable Rate Mortgages (ARMs) who figured they would only own the house for 3-4 years might now be stuck with either a high interest mortgage, or selling the home for a substantial loss.

Either way, the potential for bankrupt investors seems unnervingly real. With new laws making it harder for one to declare bankruptcy, we could become a nation with huge individual debt...and that would certainly hurt our economy.

Scott publishes and maintains Stock Market Plus, a financial blog with topics ranging from Investing to Debt Control. Visit him at http://www.stockmarketplus.com