Pop! Why the Bubble Burst
Always with an eye to the real estate and other financial markets, my fellow Tennessee blog-bud brought this article to my attention, How Irrational Were California Real Estate Prices? This divey little house …
… was assessed by the county in 2004 for $26,352. In 2005, it was valued at $27,414. In 2006? (Are you sitting?) …
$522,000
You read that right. Les found the article about the insanity over at Dr. Housing Bubble, where more details are provided (and more photos!). Dr. Housing Bubble explains step-by-step how the housing bubble grew before it popped,
We saw this error or bias played out many times. I would speak to people during the peak and get responses like, “all those other people paid too much and are stupid with getting a fixed mortgage. But see, we are smart because we got an option ARM and are going to sell it off in 3 years at a nice profit.” After all, this belief is central to any mania especially in a speculative bubble. People want to believe that an endless pot of gold is at the end of every rainbow and don’t want to think about a greedy penny pinching leprechaun who is ready to take their credit cards away.
The excerpt is followed by the steps to the burst. For example,
(d) Going mainstream: The masses believe real estate never goes down. The media saturates the airwaves usually bringing on snake oil salesmen to prime the pump. Now, not only does real estate only go up it goes up big. The bubble inflates exponentially.
(e) Manic rush: Everyone races in. Mortgage equity withdrawals. Flipping by amateurs is not only done, but has a television show dedicated to it. Real estate is now romantic like stocks during the 1920s.
And then POP! This cautionary tale is one for the history books. Thanks Les. And thanks, Dr. Bubble.
