What’s a bubble?

The recent Forbes Investment Guide┬áincluded 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’.