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

To: GraceZ who wrote (28339)	3/18/2005 7:04:38 PM
From: Elroy Jetson	Respond to of 306849

Although your description is concise, it is more the description of a "fully-valued market" rather than a "bubble". The entry level buyer is always weighing buying vs. renting, these two things get too far away from each other in price, they'll opt to stay renters. To meet the definition of a real bubble, people are acquiring an asset in the expectation of future price increases, even though the economics of the future income stream do not support the current or higher price. Since bubble participants are, by definition, already paying more than the asset is worth, the only thing that can stop them is when they reach their limits to continue to pay. This is when the mania ends - when there are no more buyers. Some buyers will have dropped out of the incipient bubble based on economics - but they weren't the people willing to buy a property with a 2% Cap Rate in the first place so they don't participate in the bubble proper. Only speculators participate. Some know it's a bubble and hope to get out in time while others are blissfully ignorant, boasting daily of their business acumen. In the final analysis, the success of actual bubble participants depends more on luck than genius. People will sometimes use the word "bubble" in a casual context, such as this wholly wrong definition: a temporary period of very successful economic performance by a country, which is often followed by sudden economic failure. freesearch.co.uk but this is definitely not a bubble. A bubble is characterized by "irrational investment", not "successful economic performance". This definition is closer, but leaves much unsaid and unexplained: An economic bubble occurs when speculation in a commodity causes the price to increase, thus producing more speculation. The price of the good then reaches absurd levels and the bubble is usually followed by a sudden drop in prices, known as a crash. Economic bubbles are generally considered to be bad things because they cause mis-allocation of resources into non-productive uses. In addition, the crash which follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise as was the case of the Great Depression in the 1930s and Japan in the 1990s. investordictionary.com