What’s a bubble?

The recent Forbes Investment Guide included this article about how big money is buying foreclosed homes, fixing them up and renting them out. I think it’s a great example of a capitalism at work fixing a mess (junked out homes) created by bureaucrats trying to get votes by helping everyone ‘realize the dream of home ownership‘.

It also raises good questions about whether this is creating another bubble as the big money buying of residential property is pushing up prices and the investors are once or twice removed from the transaction.

Could be. We’ll see. Most markets have transient phases before settling into steady state. Attractive profits attract investors. That pushes up demand and prices to the point where a few marginal players drop out, and prices and demand drop some.

I’m not sure I’d call that a bubble. That’s business a usual.

I’d be more concerned about a bubble if the third (or fourth) party investors were investing in properties not because of the economics of the individual deals, but rather, on the hope that someone else would bail them out if they make bad decisions.

I think politicians will be less likely to want to bail out these investors, who were chasing profits rather than the ‘dream of home ownership’.

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4 thoughts on “What’s a bubble?

    • Oh yeah, Watch out if that happens. What a terrible argument that was, but it did its job at getting people to stop thinking.

  1. Hi Seth: As an investor in this space (depressed rental properties), I think that in many regions much of the low hanging fruit has already been picked. That is not to say that there are not plenty of bargains to be found in some areas, just that distinguishing the bargains from the junk takes more expertise. In some areas (Atlanta), the property prices dropped so drastically that units are being rented for 25%-35% of the purchase price!

    The unfortunate thing is that some liberal will no doubt come along and complain that the investors who purchased the properties at the low prices “took advantage of” or “exploited” those who sold the properties. They will ignore the fact that (1) these investors had the money to invest because they didn’t buy when prices were going up, i.e. they didn’t contribute to the first bubble, and (2) these investors were the only ones willing to provide liquidity (cash) to those eager to unload their “worthless” properties, i.e. they were the only ones willing to take a risk on properties whose value was dropping. The liberal politicians will be sure to demonize these investors for being prudent with their money – a skill that our politicians would be wise to emulate.

  2. Aren’t most of the properties bought from banks who are foreclosing on the properties? I can’t imagine a politician feeling too sorry for the banks.

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