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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Henry D who wrote (18019)	3/2/2004 1:25:54 PM
From: Elroy Jetson	Read Replies (2) \| Respond to of 306849

A bubble exists when investments cannot be supported by the income they produce and positive investment returns relies on further price increases. Since a bubble is supported by psychology rather than economics, it is difficult to predict what will bring about a change in sentiment. The enthusiasm of the participants could be quenched by reduced employment perhaps due to off-shoring, or a rise in interest rates, or a more attractive bubble in other markets. Often the enthusiasm dissipates without any clear reason, apart from an inability to a euphoric feeling on a long-term basis. Many people believe the end of the real estate bubble of the 1980's was somehow connected jobs lost due to defense cut-backs. Total employment was reduced by roughly 2%. In a normal market you would expect this to result in a price decline of slightly more or less than 2% (depending on the elasticity of demand). The resulting post-bubble price declines of 25 to 50% in the early 1990's were due to a change in sentiment. Perhaps the 2% decline in employment triggered this change in sentiment or perhaps it was due to something else. It's difficult to know what was in the minds of the bubble participants. If you purchase real estate when interest rates are high, the price will be low. If interest rates decline the price of the property will rise and you can replace the high rate loan with a lower rate loan. A happy situation. If you purchase real estate when interest rates are low, the price will be high. If interest rates increase the price of the property will decline and you can continue making low interest rate payments on a loan which possibly exceeds the value of the property. That's not a situation I'd envy, even if the interest rates were close to zero.