"Is there a real estate bubble?" That's the question I'm asked repeatedly. When I reply honestly -- "I hope so" -- my questioners' fear occasionally turns into anger.
"Yes," I replied. "I love market crashes."
Apparently not wanting to hear the rest of my explanation, the young man stomped off muttering a word that sounded like "moron."
I've covered this subject of booms, busts, and bubbles before in my columns and books, but since the world seems to be on the brink of so many different booms and busts, I think it's a good time to revisit it.
Over the years, I have read several books on the subject of booms and busts. Almost all of them cover , the South Seas Bubble, and, of course, the Great Depression. One of the better books -- "Can It Happen Again?" -- was written in 1982 by Nobel Laureate Hyman Minsky. In this book, he described the seven stages of a financial bubble. They are:
Stage 1: A financial shock wave
A crisis begins when a financial disturbance alters the current economic status quo. It could be a war, low interest rates, or new technology, as was the case in the dot-com boom.
Stage 2: Acceleration
Not all financial shocks turn into booms. What's required is fuel to get the fire going. After 9/11, I believe the fuel in the real estate market was a panic as the stock market crashed and interest rates fell. Billions of dollars flooded into the system from banks and the stock market, and the biggest real estate boom in history took place.
Stage 3: Euphoria
We have all missed booms. A wise investor knows to wait for the next boom, rather than jump in if they've missed the current one. But when acceleration turns to euphoria, the greater fools rush in.
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