ABSTRACT
This chapter describes the causes of housing bubbles, why they eventually burst, and the macroeconomic effects of bubbles. Housing bubbles concentrate their impact in the home building, materials and furnishings, real estate sales, and mortgage businesses. There are three basic views of bubbles that are held by economists and the general public. The mainstream view does not believe in bubbles and attributes such changes in the economy to real factors such as technology shocks, and believes there is nothing the government can do to solve such real problems. The second view, which is espoused by Keynesians and by proponents of Behavioral Finance, is that bubbles exist because of psychological factors such as those captured by the phrase "irrational exuberance." The Austrian business cycle (ABC) theory incorporates real and psychological changes into a view where bubbles are caused by the policy manipulation of the Federal Reserve.
