Final answer:
Upward filtering in the housing market occurs when affordable housing units become expensive and occupied by higher income households, often due to gentrification and development. The early 2000s housing bubble is an example of market volatility, with rising prices and high risk lending practices like subprime loans. The unsustainable price growth eventually resulted in many homeowners being 'underwater'.
Step-by-step explanation:
Upward filtering in the housing market refers to the process where housing units that were once affordable to the lower or middle income brackets become more expensive and end up being occupied by higher income households. This can often be a consequence of the gentrification process where investment in a neighborhood leads to rising property values and subsequently, rents. This phenomenon can be exacerbated by local employers increasing their workforce or city development projects, creating a demand for higher-end housing, thus driving up home values. These chain reactions in the housing market may lead to a situation where there is an inadequate supply of affordable housing for lower-income residents.
The housing bubble in the early 2000s serves as a significant example of housing market volatility. With a sharp rise in housing prices driven by high demand and low interest rates, financial institutions offered flexible subprime loans to borrowers. Home prices surged based on the expectation that they would keep rising, which enabled borrowers to refinance mortgages rather than making higher payments later on. This unsustainable growth in the housing market, with complex factors like subprime lending and NINJA loans, ultimately led to many homeowners owing more than the reduced worth of their homes, a condition known as being 'underwater'.