The definition of a "Bubble"

[Will K]

[Xing Zhu]

The US housing price during the bubble period in comparison with housing markets in many other nations wasn't really high, even relative to the income.

The bubble should not just be defined by the size. We must also look at it from within instead just from without. In my opinion, what made the US hosing market a bubble a few years ago were the following four factors beside the high price level:

(1) The high leverage: The leverage was as high as 125% so that the mortgages couldn't be viewed as secured.

(2) Low quality of the debt: People with very low credit scores were able to finance cheaply and easily. You simply cannot do this in any other business.

(3) The non-recourse law: In other nations, such as Canada, there is no such law.

(4) Strategic Default promoted by an Arizona law professor: The mortgage structure wasn't designed to the extent to be viewed as a regular business debt. It it were, the rate needed to be much higher, at least higher than that of most high yield papers.

Policy makers and banks are currently taking steps to repair (1) and (2). Factor (3) is governed by laws of certain states, and therefore is beyond the power of federal government to make changes.

Factor (4) had changed the US housing culture forever. The lender has to recalculate the risk accordingly to decide the rate. Their mathematical models have to be redesigned.
Factor (4) couldn't be seen prior to the burst of the bubble. It was a brand new product.