A “can’t miss” investment

From the Edmonton Sun

Housing on the bubble

He asked me what I did for a living just as I teed up. I have a hard enough time making the ball go where I want it to, so I normally don’t discuss business while playing, certainly not in the middle of my set up. I mumbled a curt “financial planning” and didn’t elaborate further. His immediate response was “so I guess real estate is the only way to go, eh?” As I watched my ball slice deep into the forest, I replied, “Sure.”

But the thought that stayed with me for several days was, when folks start talking this way, a real estate bubble must be in the offing.  

A bubble in any market, whether it’s in technology stocks, junk bonds, gold and oil futures, tulips or real estate begins with a legitimate price surge. Prices keep rising because demand for a commodity exceeds supply. As demand expands, higher bidders replace lower ones and the volume of transactions increases. The bubble begins when bidders start to use perceived, rather than real value, to make their decisions. And then it gets silly.

People begin to say that it’s a “can’t miss” investment. They believe that this time it’s different. They begin to believe that the more you pay, the more it’s worth.

Then, as more players enter the market, the bubble fills, stretching the bubble beyond the market’s limits. Then a catalyst appears that changes the dynamics of the market; it might be a 9-11-like catastrophe, a severe rise in interest rates, or as simple as a newer, better type of product appearing in the marketplace. It’s often the sudden discovery that the emperor actually hasn’t a stitch on his portly bod.

Suddenly, buyers rethink their positions, demand begins to dry up and the bubble pops, leaving the latest participants stunned and unexpectedly poorer for it.

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