Other attributes
What goes into a housing bubble? It might help some people to think of a housing bubble much like any other kind of bubble. While most are filled with air, a housing bubble is full of speculation, which might bear a surface resemblance to investing, but really isn't like it at all.
Bubbles like the housing market of the mid 2000s are characterized by a rapid increase in price, an increase driven by the fact that speculation is, at heart, an impulsive pursuit driven by "investors" who don't want to miss out on the chance to make a lot of money quickly. The development of a bubble requires an impulsive buyer and a shallow market. As opposed to deep markets, which can absorb temporary supply shocks, a shallow market (like local real estate) tends to react wildly to shortages or gluts in supply. Prices can shoot up quickly and then drop just as fast.
Ultimately, bubbles are driven by speculation and speculation is all about human psychology. Deep-pocketed speculators can sense a developing bubble like sharks sense blood in the water. They swoop in and buy everything in sight. Those on the outside, with fewer resources, see an "opportunity" to make a bunch of money. They throw their good sense out the window and pay too much for an asset. Often they buy at the top of a price range, expecting prices will continue to climb. The problem is, by this time, the big speculators behind the buying surge that kicked the whole thing off have seen their money increase exponentially. They bail out with a healthy profit. With the demand that was driving the whole thing now gone, latecomers to the buying party are left to watch the value of their assets decline, sometimes sharply and quickly.
Though it's often hard to see a bubble until after it pops, one factor to keep an eye on is a detachment of price from fundamentals. In real estate, watch rental rates versus the selling price of the house. When prices swoop up considerably but rentals remain essentially the same, there's a good chance you're looking at a bubble.
